The myth of &#34;American exceptionalism&#34; is fading. Investors who once poured funds into American assets are now facing a harsh reality: the &#34;American exceptionalism&#34; that once supported the dollar's hegemony is undergoing severe tests from multiple factors.
On the 13th, UBS's latest report sounded the alarm, pointing out that with China's rise in technology and artificial intelligence, the decline in U.S. economic growth expectations due to trade frictions and tightening fiscal policies, and the hopes for accelerated fiscal spending and growth driven by Europe's ambitious security policies, all pose challenges to the &#34;overweight&#34; status of American assets.
These factors are shaking the excessive allocation to American assets that has been built up over the past decade. UBS noted that approximately $14 trillion of unhedged U.S. assets are at risk, and a 5% reduction in foreign holdings could trigger $700 billion in dollar sell-offs.
The report indicated that the dollar may face depreciation pressure due to declining confidence among foreign investors in American assets, especially in the context of European investors significantly increasing their holdings of U.S. stocks, with the euro potentially becoming 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 seen in 2020, which may indicate further declines for the dollar. Dollar sentiment has sharply reversed to the most pessimistic since 2021. Analyst Adarsh Sinha stated:
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&#34;While positions have turned bearish, they are severely lagging behind the dramatic shift in sentiment.&#34;
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<h2>The &#34;Repositioning&#34; of Global Capital</h2>
According to the latest research report from UBS Securities, the pattern of global capital flows is changing. Currently, foreign investors hold approximately $20.1 trillion in U.S. stocks and bonds, of which about $13.7 trillion are unhedged dollar assets. However, as &#34;American exceptionalism&#34; wavers, the attractiveness of these assets is declining.
Over the past decade, the holding structure of foreign investors in American assets has changed significantly. Private investors have gradually replaced central banks as the main holders of American assets, with their share rising from 65% a decade ago to 80%. Unlike central banks' foreign exchange reserves, private investors' asset allocation is more flexible and more sensitive to changes in market sentiment and economic outlook.
Additionally, the proportion of U.S. stocks held by foreign investors is also increasing, currently accounting for about 30% of the total market capitalization of the U.S. market, while U.S. investors hold only 23% of foreign stocks.
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This change means that once investors lose confidence in American assets, the speed of capital outflow may be faster than ever. The report noted that if foreign investors reduce their holdings of U.S. assets by 5%, it would lead to approximately $700 billion in dollar sales, equivalent to two-thirds of the U.S. annual current account deficit. Such a scale of capital flow is sufficient to have a significant impact on the dollar exchange rate
<h2>The &#34;Vulnerability&#34; of the Dollar Exposed</h2>
The strength of the dollar has largely relied on the excellent performance of the U.S. economy and the continuous inflow of foreign capital. However, as the notion of &#34;American exceptionalism&#34; wavers, this support for the dollar is weakening.
The report points out that the dollar may face depreciation pressure due to declining confidence among foreign investors in U.S. assets, especially against the backdrop of European investors significantly increasing their holdings of U.S. stocks, with the euro potentially becoming the dollar's main rival currency.
Moreover, the hedging ratio in the global foreign exchange market is also changing. Currently, the foreign exchange hedging ratio for foreign investors in U.S. stocks is only 20%, while for fixed income it is 50%, meaning that most U.S. assets are exposed and unhedged. Once market sentiment reverses, these unhedged assets could quickly trigger a sell-off of the dollar.
As the notion of &#34;American exceptionalism&#34; wavers, the pattern of global capital flows is changing. European investors have significantly increased their holdings of U.S. stocks in recent years, but with the improvement of the European economic outlook and supportive fiscal policies, some funds may flow back to Europe. Additionally, emerging market investors are also reassessing their portfolios, with some funds potentially moving to Asia and other emerging economies.
Regionally, European investors are the largest holders of U.S. stocks, holding about $4.6 trillion, followed by Canada ($2 trillion), the UK ($1.9 trillion), and Japan ($1.1 trillion). If the European economic recovery and fiscal policy support can be sustained, these funds may pose a &#34;potential threat&#34; to the dollar.
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Despite the wavering of &#34;American exceptionalism,&#34; the trajectory of the dollar remains uncertain. If the U.S. economy can regain attractiveness through policy adjustments and market recovery, the dollar may still be able to regain its footing. However, with the changing pattern of global capital flows, the dollar's hegemonic position may no longer be as solid as it once was

UBS pointed out that the rise of AI in China, the decline in economic growth expectations in the United States, and the hope for increased fiscal spending in Europe all pose challenges to the "overweight" status of U.S. assets. Approximately $14 trillion of U.S. unhedged assets are at risk, and it is expected that a 5% reduction in foreign investment could trigger a $700 billion sell-off of dollars

- The myth of "American exceptionalism" is fading, as investors face challenges to the dollar's dominance due to various factors.  
- UBS reports that approximately $14 trillion in unhedged U.S. assets are at risk, with a potential $700 billion dollar sell-off if foreign investors reduce holdings by 5%.  
- As foreign confidence in U.S. assets declines, the dollar may face depreciation pressure, particularly with increased European investment in U.S. stocks, potentially positioning the euro as a major competitor.

The "American exceptionalism" is shaken, global capital is re-aligning, and the dollar may face a $700 billion sell-off impact!