FRANKFURT: US President Donald Trump’s trade threats towards European governments over Greenland raise the possibility the latter may trim their holdings of US assets, supporting the euro, according to a Deutsche Bank AG strategist.
Europe is the United States’ largest lender with its countries owning US$8 trillion of US bonds and equities, almost twice as much as the rest of the world combined, George Saravelos, Deutsche Bank’s global head of foreign exchange research, wrote in a note to clients on Sunday.
“In an environment where the geoeconomic stability of the western alliance is being disrupted existentially, it is not clear why Europeans would be as willing to play this part,” he said.
“Developments over the last few days have the potential to further encourage US dollar rebalancing.”
Trump’s new tariffs on European countries over Greenland could also be a catalyst for greater European political cohesion, also suggesting that any negative fallout on the euro against the US dollar this week may be short-lived, Saravelos said.
While the common currency opened lower against the dollar yesterday, it subsequently rallied to trade 0.2% stronger on the day at US$1.16 in Singapore. US and European equity index futures both fell.
“The key thing to watch over the next few days” is whether the European Union activates its anti-coercion instrument (ACI), Saravelos said.
French President Emmanuel Macron will make the request, according to a person close to the president who requested anonymity to comply with government rules. The ACI allows for the European Union to take wide-ranging punitive measures against an entity seeking to use economic coercion, such as tariffs or investment restrictions.
“With the US net international investment position at record negative extremes, the mutual inter-dependence of European-US financial markets has never been higher,” Saravelos said.
“It is a weaponisation of capital rather than trade flows that would by far be the most disruptive to markets.” — Bloomberg
