Structural selling in the dollar more likely to come from Europe – BofA

BofA argues that the dollar remains in a precarious spot and while there is plenty of focus on China diversifying away from dollar-denominated assets, it is Europe that should be watched more closely instead. As a reminder, the US Treasury will be releasing its TIC report for December 2025 later this week on 18 February. I briefed more about that earlier here.”A report on China’s regulator guiding banks to limit UST exposure weighed on USD, reigniting concerns around structural reallocation away from US assets. However, the diversification of China’s holdings – both private and official – away from US assets has been evident in the data for a while. The share of USD bonds in China banks’ external portfolio for instance already fell markedly in 2025.”The report in question is this one here: China calls on banks to reduce US Treasuries exposure amid “market volatility”As for the reduction in China’s holding of US debt, the trend is evident based on the TIC report as mentioned. However, it isn’t as straightforward as the report does not cover China’s holding via non-US custodians. And it is almost certainly that they are still stocking up on Treasuries via Belgium and/or Luxembourg. So, the marked drop from China on any charts needs to be taken in this context.Anyway, BofA adds that:”In terms of fresh structural USD selling, the focus should be on Europe where holdings are concentrated in equities with lower hedge ratios. Equity flows do not yet suggest a rush for the exit, but it seems likely that incremental flow will head more to non-US markets over time, in addition to the risk of higher hedge ratio.”That is an interesting perspective and one that could stand to reason for broader markets. I mean, we’re already seeing it play out for quite a while already with the ratio of the S&P 500 to international equities falling significantly in recent months:
This article was written by Justin Low at investinglive.com.

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