Synopsis:

TD examines whether the current market narrative marks the true end of US exceptionalism. The answer, they argue, lies in global capital flows, which reflect how shifts in savings, investment, and trade dynamics are reshaping FX markets and long-term USD prospects.

Key Points:

• US Exceptionalism in Question:

  • The most debated issue among clients is whether we are witnessing the end of US exceptionalism.

  • TD cautions that this may be a temporary narrative—only time and structural data will confirm.

• Global Investment Patterns Are Shifting:

  • The world is undergoing a broad economic reshaping, impacting savings behavior, capital allocation, inflation, and long-run growth.

  • These shifts are transmitted through global capital flows, which serve as a barometer of investor sentiment and structural change.

• Twin Deficits and Foreign Funding Dependence:

  • The US has relied on foreign buyers—especially Asia for Treasuries and a more global base for equities—to fund its current account and fiscal deficits.

  • Over the past 5 years, equity flows have been the main marginal driver supporting the USD.

• What Happens if the Narrative Breaks:

  • A less exceptional US combined with a more confrontational trade policy may drive global investors to diversify away from USD-denominated assets.

  • This could trigger a pivot toward FX value strategies, favoring undervalued currencies and reducing USD dominance.

Conclusion:

While the USD’s strength has long been underpinned by global confidence in US assets, TD warns that capital flow dynamics are shifting. If the narrative around US economic leadership continues to erode, global investors may reduce USD exposure—posing structural downside risks for the greenback.