Amid escalating tensions between the United States and Europe concerning Greenland, strategists at Deutsche Bank note that while President Trump has revived trade threats against European nations over the issue, the potential impact on the euro may be constrained due to America's reliance on European capital. In a report to clients issued on Sunday, George Saravelos, Global Head of FX Research at Deutsche Bank, highlighted that Europe, as the largest creditor to the US, holds a key strategic advantage, with European nations owning a total of $8 trillion in US bonds and stocks—a figure nearly double the combined holdings of the rest of the world. He stated, "When the geo-economic stability of the Western alliance faces fundamental challenges, whether Europe is still willing to continue playing this role will be called into question," adding, "Recent developments may further catalyze a rebalancing of dollar asset allocations." Deutsche Bank analysts warn that as the geo-economic stability of the Western alliance is fundamentally tested, European investors' willingness to continue allocating to dollar-denominated assets may diminish. An early indicator has emerged: a Danish pension fund has recently begun repatriating capital and reducing its dollar exposure, a trend that could accelerate and spread across Europe as the situation evolves. The analysis specifically points out that during the sensitive period leading up to the US midterm elections, Europe may possess potential leverage—the current core concerns of the US government are curbing inflation and Treasury yields, areas where Europe precisely holds influence. Saravelos analyzed that Trump's threat of new tariffs on Europe over Greenland could paradoxically catalyze greater European political cohesion, suggesting that downward pressure on the euro against the dollar this week may be difficult to sustain. He particularly emphasized the need to closely monitor in the coming days whether the EU will activate its "Anti-Coercion Instrument," with anonymous government sources indicating that French President Macron will formally make such a request. "US net international investment position has fallen to a record negative extreme, and the interdependence between European and American financial markets is at a historical high," Saravelos cautioned, adding, "Compared to trade flows, the weaponization of capital currently poses the most disruptive threat to markets."
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