US relies more on foreign stock than debt flows, a dollar risk, Deutsche Bank warns

• The U.S. faces twin deficits totaling over $2 trillion (current account deficit of $1.12 trillion and trade deficit of $1 trillion in 2025), making foreign capital flows critical to government funding
• Geopolitical tensions are deterring investors from U.S. debt while the AI boom drives capital into equities, making the dollar more cyclical and 'leveraged to AI' rather than a safe-haven asset
• Despite long-term structural concerns, the dollar has recovered almost half of 2025's nearly 10% decline, boosted by U.S.-Israeli war on Iran uncertainty, expected Fed rate hikes, and record AI-related capital inflows

Summary

Key Development:

Deutsche Bank warns that the United States is increasingly reliant on foreign equity flows rather than debt investments to fund its deficits, posing new risks to the U.S. dollar.

Main Facts & Figures:

• U.S. current account deficit: approximately $1.12 trillion in 2025
• U.S. trade deficit: around $1 trillion
• The dollar fell nearly 10% in 2025 but has since recovered almost half of those losses in 2026

Market Implications:

Deutsche Bank strategist Mallika Sachdeva notes this shift creates a more volatile risk profile for the dollar. Traditional U.S. Treasury demand was countercyclical, supporting the dollar during downturns. The new equity-driven funding model makes the dollar more cyclical and heavily leveraged to volatile sectors like artificial intelligence.

Geopolitical tensions are deterring international investors from U.S. debt, while the AI boom attracts capital into U.S. equities. This exposes the dollar to technology sector volatility rather than the stable flows historically associated with Treasury investments.

Expert Views:

Reserve Bank of Australia Deputy Governor Andrew Hauser echoed concerns that this shift represents a move away from traditional "exorbitant privilege," where the U.S. could borrow freely due to the dollar's reserve currency status.

Recent Dollar Performance:

Despite structural concerns, the dollar has rebounded in 2026, supported by the U.S.-Israeli war on Iran, expected Federal Reserve interest rate increases, and record capital inflows targeting AI investment opportunities.

The analysis suggests investors should reassess dollar exposure given its changing risk characteristics and increased correlation with equity market cycles.