Foreign Investors Slow U.S. Asset Purchases, Threatening Dollar's Reserve Status

Deutsche Bank has issued a warning that foreign investors are continuing to withdraw from U.S. assets, posing a challenge to the dollar's status as the global reserve currency. Despite a recent market rebound, foreign investors remain cautious about U.S. assets. Deutsche Bank's foreign exchange strategy chief, George Saravilos, has been closely monitoring the flow of funds into various funds that attract foreign capital and then invest it in the U.S. stock and bond markets.

According to Saravilos' report released this week, data indicates that foreign buyers have significantly slowed their purchases of U.S. assets over the past two months. This trend has not improved despite last week's market recovery. The report suggests that the slowdown in capital inflows or the significant reduction in U.S. asset investments poses a threat to the dollar, which is characterized by twin deficits.

Saravilos, who had been bullish on the dollar for over a year until February, has since become one of the prominent voices warning about the potential loss of the dollar's reserve currency status. He cautions that if President Trump's economic policies lead investors to sell off U.S. assets accumulated over the past decade, the dollar could lose its global reserve currency status.

Historically, the U.S. has been a magnet for foreign investment, and this trend has accelerated in recent years as the U.S. market outperformed other global regions. Deutsche Bank estimates that by 2024, European investors' holdings of U.S. assets could double from around 5% in 2010 to 20%, while Japanese investors' holdings could double to 16%.

However, since April, when Trump announced plans to raise tariffs on trading partners, the dollar and U.S. stock and bond markets have both declined. This rare simultaneous sell-off has raised concerns about a large-scale withdrawal of foreign investors from the U.S. market. To better understand these trends, Saravilos analyzed the daily fund flows of approximately 400 ETFs focused on the U.S. and registered overseas, as well as weekly data from a broader range of closed-end and open-end investment funds.

The report highlights that ETF data shows a continuous sell-off, with investors selling in both the stock and bond markets. While broader fund data, which includes slower-moving funds from non-European regions, shows that investors have stopped buying U.S. stocks but have not yet become net sellers, the bond market is experiencing "aggressive selling."

Saravilos has downgraded his dollar forecast, stating that Trump's policies have reduced foreign investors' willingness to finance U.S. trade and budget deficits. He predicts that by 2027, the euro-to-dollar exchange rate could fall from the current approximately 1.14 to 1.30, and the dollar-to-yen rate could rise from the current approximately 142 to 115.