Very Impressive Chart! Robin J Brooks disentangles two common narratives about the United States. The first mistake is to interpret a weaker dollar as proof that “the world is abandoning America.” The second is to assume that continued foreign buying of U.S. assets means the dollar must therefore remain strong. The story that foreign investors are pulling out of U.S. assets is simply not supported by the actual flow data. On the contrary, foreign inflows into U.S. long-term assets remain among the strongest seen in more than 25 years, with especially robust demand for U.S. equities and U.S. corporate bonds. That suggests foreign investors are not systematically selling America.

My own reading and takeawy is that the forces that ultimately drive the dollar are rooted in two deeper mechanisms, not in the surface-level question of whether capital is flowing out.

The first mechanism is America’s sovereign risk premium.

As the world’s core reserve currency, the dollar is underpinned by a deeply embedded assumption that U.S. assets are effectively the global risk-free benchmark. Global capital has continued to flow into the United States not because America always offers the highest return, but because, for most of the postwar era, it has been seen as the anchor with the most stable institutions, the most predictable policymaking, and the safest asset base. An increase in sovereign risk premium does not necessarily mean “sell America.” It can just as easily mean “keep holding America, but start pricing in more risk.” Those two things can coexist in the capital-flow data, but they imply something very different for the dollar.

The second mechanism is interest rates, especially the direction of real rates.

In the short run, exchange rates are never just about nominal rates. What matters is the interaction between growth, inflation, and policy response, and how that triangle shapes real returns. A major reason the dollar has been so strong in recent years is that the United States has offered higher real yields than most other major economies.

Robin focuses on exactly this point. He argues that the dollar could still weaken from here, but for reasons very different from the market’s usual narrative. In his view, the key variable is not the collapse of “American exceptionalism,” but the growing politicization of the Federal Reserve. If the Fed continues cutting rates even while inflation remains elevated, or even starts moving higher again, then nominal rates may be held down while growth remains reasonably firm. In that environment, real yields would fall, and the dollar would come under pressure.

That would push the dollar into a new regime: stronger U.S. economic data would no longer automatically mean a stronger dollar. In fact, the dollar could even weaken as growth stays solid.