Bold takeaway: structural selling of the dollar may be driven more by Europe than by China, and that shift could reshape global markets. But here’s where it gets controversial: the full story isn’t as simple as a one-country trend, and the data invites a closer, nuanced reading.
Bank of America (BofA) argues that the dollar remains in a precarious position. While much attention has zeroed in on China diversifying away from dollar-denominated assets, European dynamics deserve even sharper focus. As a reminder, the U.S. Treasury is set to release the TIC (Treasury International Capital) report for December 2025 later this week, on February 18. I’ve covered related context before here: https://investinglive.com/news/dollar-rebalancing-theme-to-remain-in-focus-this-week-credit-agricole-20260216/
A key observation cited is that a regulatory nudge from China—urging banks to curb exposure to U.S. Treasuries—had a negative impact on the USD and rekindled concerns about a structural shift away from U.S. assets. Yet the broader diversification picture for China has been visible for some time. Notably, the share of U.S. dollar bonds within Chinese banks’ external portfolios declined markedly in 2025.
The referenced report is titled China calls on banks to reduce US Treasuries exposure amid "market volatility." You can read it here: https://investinglive.com/news/china-calls-on-banks-to-reduce-us-treasuries-exposure-amid-market-volatility-report-20260209/
Regarding China’s overall reduction in U.S. debt holdings, the TIC data suggest a trend, but the needle isn’t entirely straightforward. The TIC framework doesn’t capture China’s purchases routed through non-U.S. custodians. It’s highly probable that Beijing still adds Treasuries via intermediaries in Belgium, Luxembourg, or other channels. So, any apparent drop for China on standard charts should be interpreted with that context in mind.
Beyond China, BofA emphasizes a fresh structural tilt in USD selling leaning toward Europe. The reasoning is that European asset holdings are concentrated in equities with comparatively lower hedge ratios. While current equity flows do not indicate a mass exodus, the pattern suggests incremental capital could increasingly migrate toward non-U.S. markets over time—and with a possibly higher hedging load in the mix.
This view presents a provocative angle for broader markets. We’ve already seen clues over recent months: the ratio of U.S. large-cap exposure (as represented by the S&P 500) to international equities has declined, signaling a shift in relative positioning between the U.S. and non-U.S. markets.
Would you agree that Europe poses a greater structural risk to the dollar’s dominance than China in the near term, or do other factors—like policy shifts, inflation trajectories, or treaty-driven capital flows—pose a bigger threat? Share your thoughts in the comments.
