"Sell America": are foreign investors walking away?

The US Dollar Index has dropped to a three-year low near 98, and traders on currency and government bond desks around the world have started talking about a 'Sell America' trade. The steady selling of dollar assets suggests investors are rethinking how much extra they should be paid for America's institutional and governance risks.

The latest leg down came after the president's chief economic adviser said on Friday that the White House was studying whether Jerome Powell, the chairman of the Federal Reserve, could be removed, and the president renewed his public attacks on him. On Monday American shares, Treasuries and the dollar fell together, a combination more familiar in emerging markets than in the issuer of the world's reserve currency. Gold rose to yet another record.

Three assets falling at once

Normally at least one of America's main assets rallies in a crisis. When shares fall on fears of recession, Treasuries rise; when the world panics, the dollar strengthens. Since the tariff announcements of early April, there have been several sessions in which all three fell together. That pattern implies that the problem is not a particular sector or a particular risk to growth, but the country itself as a place to hold capital.

Fed independence is central to that judgement. Foreign investors lend to the American government in dollars, trusting that inflation will be kept in check by a central bank insulated from political pressure. If the president could dismiss the chairman over a disagreement about rates, investors would have to assume a higher risk of inflation over the life of a long bond, and demand compensation for it. The law allows governors to be removed only for cause, and the Supreme Court is considering a related case on the president's power to fire the heads of independent agencies, so the question is live.

Paying for unpredictability

Foreign sovereign wealth funds and central banks put hundreds of billions into Treasuries because they expect American institutions to be predictable, its courts independent and its commercial dealings bound by international rules. That confidence erodes when trade policy is made by unilateral decree, tariffs are used as geopolitical clubs and deficits grow with nothing in Congress to stop them. Bond investors now want a higher term premium to hold long-dated American debt.

The term premium is the extra yield investors demand for holding a long bond rather than rolling over short-term bills. For much of the 2010s it was close to zero or negative, because Treasuries were seen as insurance that investors would pay to own. It has risen since, as inflation returned and deficits widened. Each additional rise feeds through quickly to American borrowers, because mortgage rates and corporate bond yields are priced off long-dated Treasuries. A higher premium therefore works like a tax on American borrowing, imposed by markets rather than by Congress.

A bigger bill to refinance

The timing is awkward for the Treasury. Federal debt held by the public has grown rapidly since the pandemic, and gross debt now exceeds $36 trillion. A large share of it must be refinanced each year, and deficits add fresh borrowing on top. Foreign holders own a substantial part of the market, with Japan and China the largest; China's holdings have been falling for a decade. If foreign buyers step back, domestic investors must absorb more, and they will do so only at higher yields.

America has lost its top credit rating at two of the three big agencies, at Standard & Poor's in 2011 and at Fitch in 2023, both times over fiscal governance rather than any doubt about its ability to pay. Neither downgrade drove investors away, because there was nowhere else to go. The question now is whether the accumulation of fiscal, trade and institutional risks changes that calculation at the margin, for the next dollar of reserves rather than the existing stock.

Reserves drift away

The dollar is still by far the main currency for settling international trade, but its share of central bank reserves is shrinking faster than before. Reserve managers are putting new money into European government bonds, baskets of Asian currencies and physical gold.

The long-run trend predates the current administration. According to IMF data, the dollar's share of identified official reserves has fallen from around 70 per cent at the turn of the century to below 60 per cent. Most of the loss went not to the euro but to smaller currencies such as the Canadian and Australian dollars and, to a lesser degree, the yuan, while central banks have separately been buying gold at a rapid pace. Sterling's decline as a reserve currency in the twentieth century is the nearest precedent, and it took decades, with Britain's own policy mistakes accelerating a shift that economic decline had set in motion.

Who pays for the premium

The losers from a lasting 'Sell America' trade would be American borrowers, from the Treasury to homeowners, who would pay more to borrow; American consumers, who would pay more for imports; and foreign holders of unhedged American assets, who have suffered currency losses on top of market falls. The winners include European and Japanese bond markets, which gain inflows, gold producers, and American exporters helped by a cheaper dollar.

The strongest counterargument is that this is a cyclical correction from an overvalued dollar, amplified by hedge funds, and that no rival can replace the Treasury market's depth and liquidity. That is true of the stock of reserves, and it limits how far the repricing can go. It does not prevent investors from demanding a higher premium on new money. Watch foreign holdings in the Treasury's monthly capital-flow data, auction results for long bonds, any move to challenge the Fed's independence, and budget negotiations in Congress over extending the 2017 tax cuts.

'Sell America' looks less like a passing trade than a lasting repricing, and as long as its deficits keep growing and its policy stays erratic, Washington will probably pay more to borrow from abroad than it did before. American households will feel it through mortgage rates that stay stubbornly high even if the Fed cuts, and the Treasury will feel it at every long-bond auction this year.