The myth of "American exceptionalism" is fading. Investors who once poured funds into US assets are now facing a harsh reality: the "American exceptionalism" that once supported the dollar's hegemony is undergoing severe testing from multiple factors.

On the 13th, UBS Group's latest report sounded the alarm, pointing out that with China's rise in Technology and AI, the decline in growth expectations for the USA due to trade frictions and tight fiscal policies, and the ambitious security policies in Europe leading to fiscal spending and hopes for accelerated growth, all pose challenges to the "overweight" position of US assets.

These factors are shaking the excessive allocation to US assets that has been established over the past decade. UBS Group pointed out that about $14 trillion in US unhedged Assets are at risk, and if foreign capital reduces Shareholding by 5%, it could trigger a $700 billion sell-off of dollars.

The report indicated that the dollar may face depreciation pressure due to declining confidence from foreign investors in US assets, especially against the backdrop of European investors significantly increasing their holdings in US Stocks, where the euro may become the main rival currency to the dollar.

A recent report from Bank of America also showed that the gap between bearish sentiment on the dollar and investors' dollar exposure has reached levels last seen in 2020, which may indicate further declines in the dollar. The popularity of the dollar has sharply reversed to the most pessimistic levels since 2021. Analyst Adarsh Sinha stated:

"Although positions have turned short, they are severely lagging behind the dramatic shift in sentiment."

The global capital "realignment".

According to the latest research report from UBS Group, the pattern of global capital flows is changing. Currently, foreign investors Hold about $20.1 trillion in US Stocks and Bonds, of which approximately $13.7 trillion are unhedged US dollar Assets. However, as the notion of 'American exceptionalism' shakes, the attractiveness of these Assets is declining.

Over the past decade, the structure of foreign investors' holdings in US Assets has changed significantly. Private investors have gradually replaced central banks as the main holders of US Assets, with their share rising from 65% a decade ago to 80%. Unlike the Forex reserves held by central banks, private investors' asset allocation is more flexible and more sensitive to changes in market sentiment and economic prospects.

In addition, the proportion of US Stocks held by foreign investors is also increasing, currently accounting for about 30% of the total market capitalization in the USA, while US investors hold only 23% of foreign Stocks.

This change means that once investor confidence in US Assets declines, the speed of capital outflow may be faster than ever. The report notes that if foreign investors reduce their holdings of US Assets by 5%, it would lead to about $700 billion in US dollar sales, equivalent to two-thirds of the USA's annual current account deficit. This scale of capital flow is sufficient to significantly impact the Exchange Rates of the dollar.

The 'vulnerability' of the dollar is exposed.

The strength of the dollar has largely depended on the excellent performance of the US economy and the continuous Inflow of foreign capital. However, as the notion of 'American exceptionalism' shakes, this support for the dollar is weakening.

The report indicates that the dollar may face depreciation pressure due to the declining confidence of foreign investors in US Assets, especially in the context of significant increases in US Stocks holdings by European investors, which may position the euro as the main rival currency to the dollar.

Moreover, the hedging ratio in the global Forex market is also changing. Currently, the Forex hedging ratio for foreign investors in US Stocks is only 20%, and for fixed income, it is 50%, meaning that most US Assets are exposed and unhedged. Once market sentiment reverses, these unhedged Assets may quickly trigger a dollar sell-off.

With the erosion of the 'American exceptionalism', the pattern of Global capital flows is changing. European investors' holdings of USA Stocks have significantly increased in the past few years, but with the improvement of the European economic outlook and the support of fiscal policy, some funds may return to Europe. In addition, Emerging Markets investors are also reassessing their portfolios, with some funds likely to flow into Asia and Other emerging economies.

Regionally, European investors are the largest holders of USA Stocks, holding approximately 4.6 trillion USD, followed by Canada (2 trillion USD), the United Kingdom (1.9 trillion USD), and Japan (1.1 trillion USD). If the European economic recovery and the support of fiscal policy can be sustained, these funds may pose a 'potential threat' to the USD.

Although 'American exceptionalism' is wavering, there is still uncertainty regarding the trend of the USD. If the USA economy can regain attractiveness through policy adjustments and market recovery, the USD still has a chance to stabilize. However, with changes in the Global capital flow pattern, the hegemonic position of the USD may no longer be as solid as in the past.

Editor/lambor