How much further can US debt grow without the USD suffering? – Commerzbank

On December 27, the US statistical office will publish a figure that is unlikely to attract much public interest: the net foreign debt of the United States. Yet the development of the US external debt is ultimately crucial to how long the current US dollar strength can last, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

High risk that earnings outlook is not set to improve

“Meanwhile, foreigners are achieving much higher returns on their investments in the US than Americans on their investments in the rest of the world. This is the main reason why US liabilities are now growing significantly faster than US claims.”

“I show that it follows that because US companies are to a significant extent owned by foreigners, a business-friendly US policy increases the US debt to the rest of the world, regardless of whether the US continues to import more goods than it exports or not.”

“The only way to justify the current USD valuation in the medium term is if the earnings outlook for capital invested in the US continues to improve – not just if the current earnings outlook is confirmed. I believe there is a high risk that the earnings outlook will not continue to improve. If that is the case, the dollar will have to weaken.”