Core Points - The U.S. dollar index (DXY) fell by 10.8% in the first half of the year, marking the largest decline since 1973, despite significant net capital inflows into the U.S. [1][2] - The decline in the dollar index is attributed to marginal changes in international capital flows rather than a direct correlation with foreign investment in U.S. securities [2][3] - New trade agreements initiated by the U.S. government are expected to reduce the attractiveness of U.S. securities for foreign investors, potentially undermining the dollar's status as a reserve currency [1][12][14] Capital Flow Analysis - In the first half of the year, the U.S. attracted a net capital inflow of $767.7 billion, a 2.78-fold increase year-on-year, despite a significant drop in the dollar index [2][3] - The net inflow decreased by $200.8 billion (20.7%) compared to the second half of the previous year, primarily due to a reduction in private foreign investment [2][3] - Private foreign investment decreased by $325.8 billion, contributing to a 162.3% drop in net capital inflow, while official foreign investment shifted from a net outflow to a net inflow of $1.08 billion [2][3] Securities Investment Trends - Foreign investors did not significantly reduce their holdings of U.S. securities but instead decreased their cash holdings in dollars while increasing investments in foreign securities [3][4] - Foreign investors net purchased $941.9 billion in U.S. securities, a record high for the first half of the year, with a notable increase in U.S. Treasury purchases [3][4] - There was a marked decrease in purchases of U.S. corporate stocks, reflecting a reduced risk appetite among foreign investors due to U.S. economic and trade policy uncertainties [4][5] Official Foreign Investment Insights - Official foreign investment in U.S. Treasury securities saw a significant turnaround, moving from a net sell of $57.6 billion to a net buy of $115.9 billion [5][10] - The overall interest in U.S. Treasury securities among private and official foreign investors showed a stark contrast, with private investors reducing their net purchases [5][10] - The trend indicates that while official foreign investors are increasing their holdings in U.S. Treasuries, private investors are becoming more cautious, particularly regarding U.S. equities [5][10] Impact of Trade Policies - The new trade agreements aim to reduce the U.S. trade deficit, which could lead to a decrease in foreign investment inflows [12][14] - The U.S. government’s aggressive trade policies may negatively impact the dollar's reserve currency status, as effective deficit reduction could lead to reduced capital inflows [12][14] - The structural relationship between trade deficits and capital inflows suggests that a decrease in trade deficits may correlate with a decline in foreign investment in U.S. securities [13][14]