Foreigners are selling off dollar assets! Morgan Stanley: But does capital have other options?
Morgan Stanley believes that concerns over tariff policies and the independence of the Federal Reserve have intensified foreign investors' sell-off of U.S. assets. However, considering the current size of the U.S. Treasury market, which is approximately $27 trillion, its depth and liquidity far exceed other potential "safe-haven" markets. The lack of alternatives with comparable size and liquidity makes it difficult for foreign investors to withdraw from the U.S. Treasury market on a large scale
Foreign capital may sell U.S. Treasuries, but where to find a safe haven?
According to Vishwanath Tirupattur, head of global quantitative research at Morgan Stanley, the U.S. market has performed exceptionally well over the past two decades, benefiting from its consistently superior economic growth compared to other developed markets and a relatively stable policy environment. The dollar's status as the world's reserve currency is solid, especially when risk markets are under pressure, with U.S. Treasuries and other high-quality fixed-income products seen as preferred safe-haven assets.
However, recent circumstances seem to be changing. Concerns among foreign investors have intensified due to the U.S. government's tariff policies and their unpredictability, along with ongoing doubts about the potential erosion of the Federal Reserve's independence.
At the same time, the growth gap between the U.S. and other developed economies is narrowing. Morgan Stanley predicts that due to tariffs and immigration policies, the U.S. growth rates will drop to 0.6% and 0.5% in 2025 and 2026, respectively.
In contrast, the bank's European economists expect the Eurozone's economic growth rate to slow to 0.6% in 2025, but thanks to fiscal stimulus, it will accelerate to 1.1% in 2026. This means that if the predictions hold true, the U.S.'s relative positive growth advantage over the Eurozone will disappear in 2025 and turn negative in 2026.
Morgan Stanley also pointed out that the correlation between the U.S. stock market and the dollar has undergone significant changes, showing a pattern more similar to emerging markets (stock market declines accompanied by a weaker dollar), challenging the market's long-standing assumptions about cross-asset relationships.
These uncertainties may lead foreign investors to reduce their allocation to U.S. assets when deploying new capital, shifting towards non-U.S. assets, and potentially increasing their currency hedging ratios against U.S. asset exposure. Both of these factors could continue to exert pressure on the dollar.
Morgan Stanley emphasizes that the key question is: where can viable alternatives be found?
Currently, the U.S. Treasury market is approximately $27 trillion in size, with depth and liquidity far exceeding other potential "safe-haven" markets, such as German government bonds or Japanese government bonds.
Morgan Stanley believes that although market concerns are boosting the relative attractiveness of the euro and yen, the lack of equally sized and liquid alternatives makes it still difficult for foreign investors to withdraw from the U.S. Treasury market on a large scale
