The dollar's future is a hot topic, and Bank of America (BofA) has an intriguing take on it. They argue that while everyone's eyes are on China's move away from dollar-denominated assets, it's Europe that might just be the real game-changer. Get ready for a twist!
China's shift has been in the spotlight, with reports of banks being guided to reduce their exposure to US Treasuries. This has sparked concerns about a potential mass exodus from US assets. But here's the catch: the data shows that China's diversification has been ongoing for a while. The share of USD bonds in Chinese banks' external portfolios has already taken a notable dip in 2025.
However, there's a wrinkle in the story. The TIC report, which tracks these shifts, doesn't account for China's holdings through non-US custodians. So, it's highly likely that China is still accumulating Treasuries through Belgium and Luxembourg. This means the significant drop in China's holdings might not be as dramatic as it seems on the surface.
And this is where Europe steps into the spotlight. BofA highlights that Europe's holdings are concentrated in equities with lower hedge ratios, which could lead to a significant structural USD sell-off. While equity flows don't currently indicate a rush for the exit, the potential for increased flow to non-US markets over time, coupled with the risk of higher hedge ratios, is a real concern.
This perspective is an eye-opener, especially when we consider the recent decline in the ratio of the S&P 500 to international equities. It's a trend that's been building for months.
So, the question remains: Will Europe's moves impact the dollar's future more significantly than China's? And what does this mean for global markets? Let's discuss and explore these intriguing possibilities further in the comments!
