Dumping US dollar assets marks the beginning of a long-term shift. Have major institutions taken action?

Source: Jin10

The actions of investors selling U.S. assets and shifting to the recovering European market mark the beginning of large institutional investors, such as pension funds, to significantly reduce their long-term exposure to dollar assets. Reports from Wall Street investment banks indicate that investors managing trillions of dollars are starting to cut back on their positions in U.S. stocks**, citing reasons including the unpredictability of Trump’s policies, attacks on the Federal Reserve Chair, and the aftermath of tariff conflicts.

Although US stocks have basically recovered the losses triggered by Trump's tax hike statement last month, they still have negative returns for the year and have underperformed similar global assets. The US dollar index has fallen more than 7% this year, with some investors pointing out a phenomenon of "capital flight" from the US to German government bonds and other assets.

Luca Paolini, the Chief Strategist at Pictet Asset Management, stated: "This is happening, the process is slow but inevitable." He added that the valuation advantage and the surge in defense spending led by Germany are catalysts for European economic growth, making Europe the "most reasonable" investment destination.

A Bank of America survey shows that in March, investors' allocation to U.S. stocks experienced the "largest drop ever," with funds shifting from the world's largest economy to Europe at the largest scale since 1999. According to Morningstar data, in April, European ETFs saw an outflow of 2.5 billion euros in investments in U.S. Treasury bonds and U.S. stocks, setting a new high since the beginning of 2023.

Kenneth Lamont, chief analyst at Morningstar, pointed out that the sale of dollar assets "reversed a long-standing trend of benefiting from strong net inflows," partly due to European investors' "patriotic sentiment" driving allocations in domestic sectors such as defense.

Global capital is undergoing intense restructuring — Recently, the euro and German bonds have surged in tandem, breaking conventional patterns, indicating that investors are seeking non-dollar safe-haven assets. Investment bank reports indicate that institutional investors are continuously selling dollars and buying euros through spot trading.

George Saravelos, the head of G10 foreign exchange strategy at Bank of America, stated that the bank "has only observed actual fund (institutional) dollar selling in recent weeks." George Saravelos, the head of foreign exchange research at Deutsche Bank, noted that there has been a "massive sell-off of dollars by real money investors over the past three months."

The Finnish Veritas Pension Insurance Company reduced its exposure to US stocks in the first quarter. Its Chief Investment Officer, Laura Wickström, pointed out that US stock valuations are too high and stated, "The uncertainty related to equivalent tariffs and the chaotic communication**,**** make us question the reasonableness of paying such a premium."**

The Danish pension fund reduced its holdings in U.S. stocks for the first time since 2022 in the first quarter, while making the largest increase in European stocks since 2018. Sam Lynton Brown, head of macro strategy at BNP Paribas, estimates that if European pension funds reduce their allocations to 2015 levels, it would mean selling off $300 billion worth of dollar assets.

The process of capital globalization is reversing. John Butler, a Wellington management interest rate strategist, pointed out: "The key lies in the depth and speed of the reversal, which will lead to net capital flowing out of the U.S. and into other markets, having structural impacts on the dollar and U.S. Treasuries and stocks."

Analysts say that given the depth and liquidity of the U.S. stock market and the nearly $30 trillion U.S. Treasury market, this trend has limitations on how far it can go.

Even the American pension funds are reassessing — Scott Chan, the chief investment officer of California's $350 billion teacher retirement fund, warned this week that the unexpected risks of "opening the Pandora's box of reciprocal tariffs" could lead to a sell-off of U.S. Treasuries by its largest trading partners. The depreciation of the dollar is particularly painful for foreign investors who have not hedged against exchange rate risks. Bank of America estimates that if European investors restore their hedging to pre-pandemic levels, it could involve hedging operations on $2.5 trillion of assets.

However, most investors remain cautious. An institutional investor admitted, "We are internally debating 'American exceptionalism' and whether to reduce allocation... Historical experience shows that shorting America has never had good results."