USD Crisis: Capital Flight Accelerates as Europe Pivots Away from 'Political Risk'

The traditional narrative of the US Dollar as the ultimate global safe haven is facing its sternest test in decades. Following a week where the Dollar Index (DXY) faced significant selling pressure, new data and analyst commentary suggest a structural shift is underway: deep-pocketed European investors are beginning to rotate out of US assets, spooked by escalating trade wars and the politicization of American financial policy.

The $10 Trillion Overhang

The scale of the potential exodus is staggering. According to market data, European investors currently hold approximately $10.4 trillion in US equities—nearly half of all foreign-owned US stocks. However, the tide is turning. Amundi SA, Europes largest asset manager with €2.3 trillion under management, reports that clients have been actively diversifying away from the US since April 2025, a trend that has accelerated sharply in recent weeks.

Vincent Mortier, Amundis CIO, noted that the rotation is driven by a desire to “hedge dollar risk” in an environment where the rules of engagement are changing. This sentiment is echoed by Scotiabank, which warns that even a fractional unwinding of this exposure could inflict “substantial damage” on US equity markets and the dollar exchange rate.

'Weaponized' Policy Erodes Trust

The catalyst for this shift is not purely economic yield, but political unpredictability. The Trump administration's recent threat to impose 100% tariffs on Canadian goods—should the US neighbor deepen trade ties with China—has sent shockwaves through the USMCA bloc, hitting CAD hard but also signaling to global allocators that no alliance is sacrosanct.

Furthermore, the administration's aggressive stance—including lawsuits against major banks and pressure on the Federal Reserve—has raised questions about the stability of US institutions. Analysts at Bruegel point out that global asset diversification is now less about seeking alpha and more about “risk reduction” in the face of US policy volatility.

Market Reaction

• DXY: Testing key support near 97.00. A break below here opens the door to further downside.
• EUR/USD: Unexpectedly resilient, buoyed by the repatriation of capital despite Europe's own economic headwinds.
• Structural Flows: While US markets still attract short-term speculative capital (hot money), foreign direct investment (FDI) into the real economy has stagnated, suggesting the quality of capital backing the Greenback is deteriorating.