Facing Trump's threats over the sovereignty of Greenland and a new round of tariff wars, Europe holds an extreme 'trump card'—its holdings of over $10 trillion in U.S. assets. The idea of weaponizing capital is sparking heated discussions in the market, but analysts point out that this represents more of a tail risk.
As Europe contemplates how best to respond to the latest threat from U.S. President Trump regarding Greenland's sovereignty, an extreme potential countermeasure is sparking debate among investors.
European countries hold trillions of dollars in U.S. Treasury bonds and equities, some of which are owned by public sector funds. Given America's reliance on foreign capital, this has led to speculation that Europe might sell off such assets in response to Trump's renewed tariff war, potentially raising U.S. borrowing costs and depressing the American stock market.
However, this is easier said than done. A significant portion of these assets is held by private funds outside government control, and in any case, such a move would likely harm European investors themselves. Thus, most strategists believe policymakers are unlikely to adopt such drastic measures, as they have generally been reluctant to confront Trump head-on since he returned to power a year ago.
Nevertheless, the fact that Deutsche Bank's global chief forex strategist openly discussed the 'weaponization of capital' underscores how such retaliatory actions are becoming a tail risk for markets as Trump's expansionist policies reshape the geopolitical landscape. EU-held U.S. assets exceed $10 trillion, according to U.S. Treasury data, with additional holdings in the UK and Norway.
"The U.S.'s massive net international investment deficit poses a potential threat to the dollar—but only if foreign holders of U.S. assets are willing to absorb financial losses," said Kit Juckes, chief forex strategist at Societe Generale.
"Public-sector investors in Europe holding U.S. assets may stop increasing their positions or begin selling, but the situation would need to escalate significantly further before they sacrifice their own investment returns for political purposes," he stated on Monday.
Escalating tensions weighed on U.S. equity futures, European stocks, and the dollar on Monday—while gold, the Swiss franc, and the euro emerged as primary beneficiaries. This reaction was a milder version compared to investor responses following Trump's tariff hikes in April last year, signaling that 'selling America' trades could resurface.
The EU's most concrete response so far has been a proposal to halt the approval process for its trade agreement reached with the U.S. in July of last year. National leaders are also engaging in discussions to consider imposing tariffs on $93 billion (€108 billion) worth of American goods, with Germany's finance minister urging Europe to prepare its strongest possible trade countermeasures in response.
Any move to weaponize European-held U.S. assets would signify a serious escalation. In effect, this would expand a simmering trade war that investors largely ignored last year into a financial conflict directly impacting capital markets.
"Despite America’s military and economic power, it has a critical vulnerability: it relies on other countries to fund its massive external deficits," said George Saravelos, Global Head of FX Research at Deutsche Bank. "It is unclear why Europeans would still want to play this role in an environment where the geo-economic stability of the Western alliance is fundamentally undermined."
While a portion of U.S. assets are held by public sector actors — the largest being Norway’s $2.1 trillion sovereign wealth fund — the majority are owned by countless private investors. Additionally, a significant proportion of U.S. securities registered in Europe may ultimately be owned by entities outside the region.
More importantly, investors concerned about overexposure to U.S. assets due to Trump's policies may have already reduced their holdings after last year's 'Liberation Day' tariffs fueled a 'sell America' trade. Despite ongoing pressure on the dollar, U.S. Treasuries ended up having their best year since 2020, while U.S. equities repeatedly hit record highs.
"Although the rest of the world still holds vast amounts of U.S. stocks and bonds, it is reasonable to assume that dollar positions have been rebalanced, which will shield them from another wave of market panic," said Jane Foley, Head of FX Strategy at Rabobank.
For now, it remains unclear whether European officials will explore ways to encourage the region’s investors to reduce allocations to U.S. assets. Researchers led by Carsten Brzeski at ING Groep noted that although Europe theoretically holds leverage through its U.S. asset holdings, a softer approach might be necessary.
"The EU can hardly force European private-sector investors to sell dollar assets," Brzeski said. "It can only attempt to incentivize investment in euro-denominated assets."
Editor/Rice
