Is the dollar becoming more dependent on stocks?
After reading papers, news, and a few conversations, I’ve come to share that market participants increasingly see the U.S. dollar as driven by stock-market performance rather than traditional bond yields. It took me some time to put this into words. This is not a shift I expected to see. Bonds are not as sexy today as they were when I finished college.
Original Post in Spanish: https://mariorandholm.substack.com/p/el-dolar-empieza-a-depender-mas-de
For those who have followed me for more than a decade, you may remember my R Option strategy, which co-developed around 2005. At the time, it gave me something every trader searches for but few ever find: a statistical edge I could trust.
The strategy was built around analyzing the movement of money between equities, bonds and money-market instruments. For years, it provided not only returns, but something perhaps even more valuable: the framework that gave me confidence when markets became difficult to navigate.
About four years ago, that edge stopped working. Since then, I have spent an enormous amount of time searching for its successor. I have tested strategies, studied new datasets, explored different signals and questioned many of the assumptions that shaped the way I traded for years. Some produced interesting results. None gave me the same combination of statistical evidence and psychological conviction that the R Option once provided.
Looking back, I believe three structural changes in the market may have contributed to this transformation.
First, the evolution from mutual funds to ETFs. I used to be able to read mutual fund flows and interpret how investors were moving capital between asset classes. The ETF market operates differently. The information is there, but the behavior of the flows and what they tell you about investor intent which of course is not the same. https://www.mariorandholm.com/2017/01/01/roption/
Second, the transformation of options markets. Hedging activity that was once heavily concentrated around monthly expirations, particularly the third Friday, has increasingly moved toward shorter-dated options: sometimes one or two days to expiration and toward much more dynamic, demand-driven hedging.
And then there is the third change. That is the subject of today’s post. It is also the most personal one.
Because somewhere along the way, I realized that I was not simply searching for another trading strategy. I was searching for something I had lost. For almost 20 years, trading was not just my profession. It was the thread connecting many of the decisions I made in my life: the jobs I accepted, the people I met, the countries and cities where I lived, the nights spent watching screens, and the sacrifices I made because I believed I was building toward something.
It was a childhood dream that became a college dream, then a career, and eventually a fundamental part of who I was.
And perhaps that is the hardest realization of all: The market changed. But so did I. Accepting that is painful.
But markets do not owe us continuity. An edge that worked for twenty years can disappear. A framework that once made perfect sense can become obsolete. And sometimes the hardest part of surviving as a trader is not finding the next strategy: it is accepting that the strategy that defined you may already belong to the past.
This post will not give you a magic formula for asset allocation. It is something more personal: an attempt to understand what happens when the market you built your identity around evolves faster than you do. Allow me to focus back to the post topic…
… here you have a few reports about the fx issue:
Foreign investors (outside the U.S.) are changing the way they finance the United States. According to a Deutsche Bank analysis based on Treasury data, during the year through June, international flows into U.S. stocks reached 2.8% of GDP, compared with 2% allocated to Treasuries.
This is an unusual shift, one that had not been observed on a sustained basis since before this century, apart from isolated episodes such as the pandemic and the global financial crisis.
I have been analyzing Lipper data for more than 20 years, and I can confirm it.
Here are some links that may be of interest:
Source on U.S. ETF flows — Lipper Alpha
and
U.S. fund-flow data — Lipper Alpha
Behind this change are two opposing forces.
On the one hand, heavy investment in artificial intelligence, growing corporate earnings, and the attractiveness of the U.S. stock market continue to attract international capital.
The S&P 500 is up close to 12% for the year, and earnings grew 52% year over year in the second quarter of 2026. Although, looking at the last decade, the S&P 500 has risen from 200 on January 1, 2016, to 760 at yesterday’s close.
On the other hand, caution toward U.S. government debt is increasing, amid greater concerns about inflation, the size of the debt which has now exceeded $40 trillion and the independence of the Federal Reserve. The 10-year Treasury reached its highest yield since 2007.
This shift is relevant not only for the bond market but also for the dollar. Several banks and asset managers, particularly European ones, warn that the United States may be moving from a financing model primarily supported by debt toward one in which equities are playing an increasingly important role.
It was previously thought and historical data supports this that foreign demand for Treasuries behaved countercyclically: during recessions or periods of risk aversion, investors sought U.S. government debt, providing support for the dollar precisely when other assets were suffering. WE WILL SEE WHEN WE HAVE A RECESSION.
Here is where you can find five different ways to look at the issue: if international flows become more closely tied to equities, this characteristic could change. The dollar could become increasingly dependent on global appetite for U.S. risk assets, particularly the technology cycle and investment in artificial intelligence.
In other words and this is a question I cannot answer myself:
If someone can help me think this through… better for everyone, right?
IF AI BOOMS → the dollar appreciates
IF AI BUSTS → the dollar depreciates??
In theory, with a much weaker economy, the dollar could lose some of its traditional behavior as a safe-haven asset and become more sensitive to corrections on Wall Street.
The other fundamental question is how long foreign investors will remain willing to finance the growing U.S. deficit.
I say it pays, roughly 5%:
You can find the graph, updated daily, here:
The United States continues to run a significant “twin deficit”, with a current-account deficit of around $1.12 trillion in 2025 and a trade deficit close to $1 trillion. The need to attract foreign capital therefore remains structural.
And the composition of those flows matters: financing the deficit by buying government debt is not the same as financing it through investments in U.S. companies.
Do you see a transformation worth considering over the long term?
Major investors and institutions such as Norway’s sovereign wealth fund indicate that Treasuries are no longer perceived as quite as clearly the “risk-free” asset as they once were, while some institutional investors are increasing their exposure to equities. Norway’s sovereign wealth fund, for example, has proposed reducing its holdings of U.S. Treasury debt by around $80 billion.
For now, the market continues to reward U.S. assets thanks to the extraordinary boost from AI investment and the growth in corporate earnings.
The paradox, therefore, is significant: the United States continues to attract enormous amounts of capital, but increasingly toward its companies and less toward its government debt.
If this trend becomes established, it could change both how the dollar functions and how it behaves during future episodes of risk aversion.
We’ll be watching!
Regards,
Mario Randholm
