The sell-off of US dollar assets marks the beginning of a long-term shift. Are big institutions taking action?

Source: Jinshi Data

Investors' move to sell off U.S. assets and turn to Europe's recovery market signals that large institutional investors such as pension funds are beginning to reduce their huge exposure to U.S. dollar assets for a long time.Wall Street investment banks report that investors managing trillions of dollars are beginning to reduce their U.S. stock positions, citing reasons including Trump's erratic policies, attacks on the Federal Reserve chairman and the aftermath of the reciprocal tariff conflict.

Although U.S. stocks have largely recovered the losses caused by Trump's tax increase announcement last month, they are still negative this year and underperforming similar assets around the world. The U.S. dollar index has fallen more than 7% this year, and some investors have pointed to the phenomenon of "capital flight" from the United States to assets such as German government bonds.

"This is happening, slowly but inevitably," said Luca Paolini, chief strategist at Swiss Pictet Asset Management. He added that valuation advantages and European economic growth catalysts such as a surge in defense spending led by Germany make Europe the "most reasonable" investment destination.

A Bank of America survey showed that investors' allocation to U.S. stocks fell by the "largest ever" in March, and the scale of funds shifting from the world's largest economy to Europe reached the largest level since 1999. Morningstar data showed that European ETF funds investing in U.S. bonds and stocks outflows reached 2.5 billion euros in April, the highest since the beginning of 2023.

Morningstar chief analyst Kenneth Lamont pointed out that the sell-off of U.S. dollar assets "reversed the long-term trend of benefiting from strong net inflows", partly due to the allocation of local sectors such as defense driven by "patriotic sentiment" of European investors.

Global capital is being restructured dramatically-the recent simultaneous surge in the euro and German government bonds, breaking the conventional pattern, indicating that investors are seeking non-dollar safe-haven assets. The investment bank reported that institutional investors continued to sell dollars and buy euros through spot transactions.

George Saravelos, head of G10 foreign exchange strategy at Bank of America, said that the bank "has only observed the selling of dollars by actual funds (institutions) in recent weeks." George Saraveros, head of foreign exchange research at Deutsche Bank, said that the past three months have witnessed "a massive sell-off of the dollar by real money investors."

Finland's Veritas Pension Insurance Company cut its exposure to U.S. stocks in the first quarter. Its chief investment officer Laura Wickström pointed out that U.S. stocks are overvalued and said that "uncertainty and confusing communication related to reciprocal tariffs make us question the rationality of paying such a premium."

Danish pension funds reduced their holdings of U.S. stocks for the first time since 2022 in the first quarter, while also increasing their holdings of European stocks by the largest scale since 2018. Sam Lynton Brown, head of macro strategy at BNP Paribas, calculated that if European pension funds reduce their allocations to 2015 levels, it would mean selling 300 billion euros worth of U.S. dollar assets.

The process of capital globalization is reversing. "The key is the depth and speed of the reversal, which will lead to net capital outflows from the United States and into other markets, with structural impacts on the dollar and U.S. bonds and stocks," said John Butler, interest rate strategist at Wellington Management. Analysts said there were limits to how far this trend could go, given the depth and liquidity of the U.S. stock market and the nearly $30 trillion U.S. Treasury market. Even U.S. pension funds are reassessing - Scott Chan, chief investment officer of California's $350 billion Teachers' Retirement Fund, warned this week that the unexpected risk of "opening a Pandora's box of reciprocal tariffs" could trigger a sell-off in U.S. bonds by the largest trading partner. The dollar's depreciation is particularly painful for foreign investors who have not hedged their currency risk. Bank of America estimates that if European investors restore currency hedging to pre-epidemic levels, it may involve hedging $2.5 trillion in assets. But most investors are still cautious. One institutional investor admitted: "We are internally debating 'American exceptionalism' and whether to reduce allocations...historical experience shows that shorting the United States has never had good results."