Foreigners sell US dollar assets! Morgan Stanley: But does capital have other options?

Source: Wall Street Insights

Will Foreign Investors Dump US Treasuries, and Where Can They Find a Safe Haven?

According to the analysis of Vishwanath Tirupattur, the head of global quantitative research at Morgan Stanley, over the past two decades, the US market has performed exceptionally well, benefiting from its continuous economic growth that outperforms other developed markets and a relatively stable policy environment. The US dollar has a solid position as the global reserve currency. Especially when the risky markets are under pressure, high-quality fixed-income products such as US Treasuries are regarded as the top choice for safe-haven assets.

However, recent situations seem to be changing. Due to the US government's tariff policies and their unpredictability, coupled with the persistent doubts about the possible erosion of the Federal Reserve's independence, the concerns of foreign investors have been intensified.

At the same time, the growth gap between the United States and other developed economies is narrowing. Morgan Stanley predicts that influenced by the tariff and immigration policies, the growth rates of the United States in 2025 and 2026 will drop to 0.6% and 0.5% respectively.

In contrast, the European economists of the bank expect that the economic growth rate of the eurozone will slow down to 0.6% in 2025, but thanks to fiscal stimulus, it will accelerate to 1.1% in 2026. This means that if the prediction comes true, the positive growth advantage of the United States relative to the eurozone will disappear in 2025 and turn negative in 2026.

Morgan Stanley also points out that there has been a significant change in the correlation between the US stock market and the US dollar, presenting a pattern more similar to that of emerging markets (a decline in the stock market is accompanied by a weakening of the US dollar), which challenges the market's long-term assumptions about the cross-asset relationship.

These uncertainties may lead foreign investors to reduce their allocation to US assets and shift to non-US assets when allocating new capital, and they may also increase the currency hedging ratio of their exposure to US assets. Both of these may continuously put pressure on the US dollar.

Morgan Stanley emphasizes that the key question is: Where can feasible alternatives be found?

Currently, the size of the US Treasury market is as high as approximately $27 trillion, and its depth and liquidity far exceed those of 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 the Japanese yen, due to the lack of alternatives of the same scale and liquidity, it is still difficult for foreign investors to withdraw from the US Treasury market on a large scale.

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