Under the tide of "de-dollarization," how much dollar assets are held by foreign capital?

How serious is the global overweight in U.S. assets?

On April 15th, Eastern Time, Deutsche Bank released a research report stating that since the financial crisis, both U.S. stocks and U.S. bonds have significantly increased in absolute scale and share of global financial assets.

According to data from SIFMA and the World Federation of Exchanges, as of the fourth quarter of 2024, the market capitalization of U.S. listed stocks exceeds $60 trillion, accounting for 50% of global listed stocks, a significant increase from one-third in 2011. A similar trend is observed in the bond market, with U.S. Treasuries alone accounting for 50% of government debt in OECD countries.

Among them, foreign investors hold approximately $18.4 trillion in U.S. stocks and $7.3 trillion in U.S. fixed income assets. Since 2010, foreign holdings in the U.S. bond market have increased by about $3 trillion, nearly doubling. Meanwhile, foreign holdings in the U.S. stock market have grown by $15 trillion, a sixfold increase. Surprisingly, 90% of this growth comes from the appreciation of U.S. asset values rather than new capital inflows.

Deutsche Bank warns that as foreign investors increase their allocation to U.S. assets, their foreign exchange risk exposure has also significantly risen, with some institutions even completely unhedged against foreign exchange risk. If this overweight in dollars reverses, it could have a significant impact on the dollar exchange rate and global financial markets.

Surge in Allocation Ratios from Europe and Japan

Regionally, Europe and Japan have significantly increased their allocation to U.S. assets over the past fifteen years. Specifically, Europe's allocation to U.S. assets has jumped from 5% in 2010 to 20% in 2024, a fourfold increase, while Japan's allocation has also risen from 7% to 14%.

For U.S. stocks, the allocation ratio for European investors has grown from about 10% in 2011 to now 35%. The allocation ratio for U.S. Treasuries has also increased from less than 3% to nearly 10%. In contrast, Japan's holding ratio for U.S. stocks has doubled from 8% to 16%, but the growth rate is less than that of Europe, and compared to the total size of the U.S. stock market, the change in Japan's holding ratio is relatively small.

The changes in Japan's holding ratio for U.S. Treasuries are more complex; although it has risen since 2015, the growth rate has not kept pace with the supply of U.S. Treasuries, leading to a gradual decline in its share of the U.S. Treasury market.

Rising Foreign Exchange Risk Exposure

It is worth noting that as foreign investors increase their allocation to U.S. assets, foreign exchange risk exposure has quietly risen According to the report, data from Japan, Sweden, and the Eurozone indicate that foreign investors have a very high foreign exchange risk exposure to U.S. assets. For example, large investment institutions such as Sweden's public pension fund have their exposure to the U.S. dollar at the highest level in a decade, with some institutions even completely unhedged against foreign exchange risk.

This means that foreign investments are not only exposed to the risks of U.S. assets but also face the risks of exchange rate fluctuations. If investors believe that the U.S. trade policy will undergo a structural change in the future, thereby weakening the uniqueness of the U.S. stock market, it may increase allocations to non-U.S. markets, which will put pressure on the dollar in the short to medium term. Deutsche Bank warns:

"Our analysis concludes that the continued return of foreign investors' dollar allocation to historical normal levels could result in significant negative dollar capital flows."

Deutsche Bank points out that the capital flows from foreign exchange hedging can sometimes be larger than the changes in the assets themselves. For example, if the hedging ratio of foreign investors increases by 1%, it could lead to a sell-off of $260 billion in dollars, which is almost equivalent to the total inflow of U.S. bonds and stocks over the past two years