The movement of money between countries, asset classes, and markets in search of the best risk-adjusted returns — the primary driver of currency movements and cross-border asset price differentials.
Deeper Explanation
Capital flows respond to differentials in interest rates, economic growth, political stability, and perceived risk across jurisdictions. When US rates rise relative to other developed markets, capital flows into dollar-denominated assets, strengthening the dollar and pressuring emerging market currencies. Emerging market crises are often triggered by sudden capital outflows: when global investors withdraw simultaneously, the local currency depreciates, raising the real cost of dollar-denominated debt, potentially triggering sovereign stress. Dalio's framework tracks capital flows as a primary indicator of which asset classes and geographies are receiving institutional attention — and which are being abandoned.
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