Americas CIO View

Trade affects Treasury demand: Less US debt and dollar demand likely abroad

Many investors are troubled by Trump’s push to establish new trade norms with costly tariffs of activity altering significance, thus, likely to affect optimum long-term US productivity potential. They are also bothered by the elevated US fiscal deficit, likely to chronically push debt/GDP (gross domestic product) higher, which is increasingly difficult for any politician or party to reign in given entitlements/ demographics and a less secure world. Investors are especially troubled by the combination of these two trends, which economists generally see as incompatible and unsustainable given the intertwined relationship of trade deficits, which help feed foreign Treasury demand, and fiscal deficits. Thus, some foreign investors are not just troubled by US tariffs and deficits, but will likely have less dollars at their disposal, desire aside, to buy Treasuries under new trade norms.

US Reshoring & Thrift?: 7% deficit paid with 4% domestic savings + 3% foreign*

* Simplification of a complex dynamic, asset appreciation and equity-to-debt conversion also fund total US investment and debt issuance
The US savings rate of households and non-profit entities was about 4% in 2024. The federal deficit was about 7%, likely to continue despite tariff revenue, and the trade or current account deficit was about 3%. We don’t expect the current account deficit to disappear, but if it shrinks, it suggests that domestic savings must rise to fund the deficit. As redirecting corporate savings from higher return private investment opportunities is neither likely nor desirable. Posing the question, what interest rate will it take to adequately boost the US savings rate? American propensity for consumption over savings vs. that of foreigners is well-known. There are also tax issues to consider as many Americans pay tax on Treasury interest and some foreigners don’t.

Dollars: Less foreign supply=less demand? Consider dollar lands and industries

It’s difficult to disentangle foreign dollar demand from Treasury demand and also trade activity, however, there is another dynamic that could affect the value of the dollar beyond the usual fundamental forces of purchasing power parity, shorter-term real interest rate differentials, and other current and capital account dynamics like trade balances and often related structural or foreign “policy” Treasury buying. This often underappreciated albeit difficult to quantify dynamic stems from the value of a currency related to its ability to access the resources of non-US economies and facilitate transactions in multinational industries such as commodities, semiconductors, etc. Saudi Arabia’s commitment to sell oil for dollars is historically an important part of dollar land. If a country has a trade surplus with the US, it can buy oil for dollars from Saudi or chips for dollars from Taiwan. These dollar receiving countries might buy US goods, or Treasuries, equities, real estate or greenfield US investment. Disrupting such arrangements or the emergence of good alternatives threatens the dollar. An example, before the financial crisis, when oil supply/demand was tight, euro assets presented a fresh alternative to dollar assets to oil exporters. This helped boost the EUR/USD FX (foreign exchange) rate and exacerbated the USD oil price spike.

DWS CIO Day: S&P 1yr target up to 6100, “just 30%” on China, digital delivers

The tariff situation remains very volatile, and much can change after the 90-day reprieves elapse. Markets took great relief in mid-April when reciprocal tariffs were cut to only the 10% base now in effect until July 9th for all countries except China. Investors gained further confidence when the China tariff was reduced to 30% until July 9th. Last week’s sudden announcements of a 50% tariff on European Union (EU) imports (suspended until July 9th) and potential tariffs on a major US company keep the risks very high. We expect the 10% base tariff to stay long-term on all countries, except USMCA (United States-Mexico-Canada Agreement) compliant imports. After deals are made, we think tariffs do not exceed 15% on imports in aggregate. Yet, we think China tariffs have up/down sensitivity to geopolitical issues at play. The US is applying high pressure tactics to the EU, exploring special bilateral deals with EU states and/or select industries to avoid higher US tariffs on broad EU imports. Because recent reprieves lower the risk of dangerously damaged relations between the US and other countries, especially China, and provide US importers more time to adapt, we raised our S&P target price-to-earnings (P/E) ratio to about 22 times trailing and 20.5x forward earnings per share (EPS) as estimated in June 2026. We didn’t change our EPS estimates, but confidence improved given delivery of strong results and encouraging outlooks by digital firms like the Great Eight with over 30% y/y 1Q25 EPS growth. Also, a weaker dollar, DWS expects euro to $1.18, should boost 12-month S&P EPS growth by 2%, all else the same.

A summer better for spectating than speculating: We position cautiously for now

Upon publication, the US International Trade Court ruled that reciprocal and fentanyl related tariffs are illegal, issuing an injunction to cease 10 days after May 28th. While in some ways a positive, it introduces further uncertainty as appeals are in progress and it might be, “out with the old and in with new tariffs,” with narrower scope, but higher sector tariff rates. Summer equity seasonality is for historically flat or negative returns two-thirds of the time. We think tariff, deficit, dollar risks remain high and we are sticking with the most digital and intellectual property/service enterprises with cautious stances on goods manufacturing/components and goods retailing.