European officials are discussing potential responses to President Donald Trump's renewed trade threats, with one extreme option involving the sale of US bonds and stocks held by European entities. These assets total trillions of dollars, including holdings in public sector funds, leading to speculation that such sales could drive up US borrowing costs and lower equities given America's reliance on foreign capital.
However, analysts note this would be difficult to implement. Most of these assets are controlled by private funds beyond government reach, and any move could also harm European investors. Strategists see a low likelihood of policymakers taking such drastic steps, citing their general reluctance to confront Trump since his return to power a year ago.
Deutsche Bank AG's chief global currency strategist has openly mentioned the "weaponization of capital," indicating this retaliation is becoming a tail risk for markets as Trump's policies reshape geopolitics. US Treasury data shows the European Union holds over $10 trillion in US assets, with additional amounts in the UK and Norway.
"The US net international investment deficit is huge, and a potential threat to the dollar, but only if foreign holders of US assets are willing to suffer financially," said Kit Juckes, chief currency strategist at Societe Generale SA. He added on Monday that European public sector investors might stop accumulating or start selling US assets, but the situation would need to escalate further before they sacrifice investment performance for political goals.
Market reactions on Monday included declines in US equity futures, European stocks, and the dollar, with gains for gold, the Swiss franc, and the euro. This mirrors a milder version of the "Sell America" trade seen after Trump's tariffs last April.
The EU has proposed halting approval of a July trade deal with the US and is discussing tariffs on €93 billion ($108 billion) of American goods. Germany's finance chief has called for Europe's strongest trade countermeasure.
Weaponizing European holdings of US assets would mark a severe escalation, turning a trade war into a financial conflict affecting capital markets. "For all its military and economic strength, the US has one key weakness: it relies on others to pay its bills via large external deficits," said George Saravelos, Deutsche Bank's global head of currency research. He questioned why Europeans would continue this role amid disrupted geoeconomic stability.
While public-sector actors like Norway's $2.1 trillion sovereign wealth fund hold significant US assets, the majority are owned by private investors, including non-European holders. Some investors may have already reduced US exposures after last year's tariffs spurred "Sell America" trades, though US Treasuries had their best year since 2020 and stocks keep setting records.
"While the rest of the world still holds a huge amount of US stock and bonds, it is fair to assume that there has been a rebalancing of US dollar positions which will protect it from another bout of market jitters," said Jane Foley, head of currency strategy at Rabobank.
It remains unclear if European officials will push investors to reallocate from the US. ING Groep NV researchers, led by Carsten Brzeski, noted Europe has theoretical leverage through its US holdings but may need a softer approach. "There is very little the EU could do to force European private sector investors to sell US dollar assets," Brzeski said. "It could only try to incentivize investments in euro assets."