In today’s Finshots, we take a look at why some investors are pulling out of US assets and why ditching them isn’t as simple as it seems.

The Story

The US dollar is falling. And that’s a bit odd. Because this is happening at a time when US bond yields are rising and the country has imposed higher tariffs. Normally you’d see both these things lifting the dollar. Also, when the world gets risky, global investors usually rush to the US. They buy US government bonds, convert their currencies into dollars. The dollar gets stronger. That’s how it’s always worked.

But that’s not what we’re seeing this time. Investors are swapping the dollar assets they hold for anything else — gold and even Japanese and European bonds. Basically, the dollar is losing its safe-haven status.

So what has changed, you ask?

Let’s start with the US bond market.

US Treasuries — basically bonds issued by the US government — are the most traded and trusted bonds in the world. The market is worth over $28 trillion. It’s so massive that when it shakes, the whole world feels it.

The reason it’s such a huge market is because export-heavy countries like China and Japan earn huge amounts of dollars from selling goods to the US. And with all those dollars, they need to invest somewhere. So they park them in US bonds (or US Treasuries) — because it’s been the safest, most liquid place for decades. That’s why China holds around $760 billion worth of US government bonds, making it the second-largest foreign holder after Japan.

But now, even this fortress is showing cracks. There’s talk that investors are pulling money out of Treasuries. And that’s causing bond yields to jump.

Sidebar: Bond prices and yields move in opposite directions. So if people are selling bonds, prices fall, and yields rise.

And the reason investors are spooked is because the US is running massive deficits. Its debt is piling up. Its policies feel unpredictable. And in the past, it has used its financial system as a geopolitical weapon — freezing reserves or cutting countries off from payment networks. Or simply put, the dollar doesn’t feel as neutral or safe today as it once did.

So yeah, investors might be looking to move their assets out of the US. But let’s take a step back and ask — does this really mean they’re abandoning US assets entirely?

Well, there’s no data out yet showing that China or Japan are offloading US bonds in large numbers to push back against the tariffs. But even if they wanted to, they won’t be able to do it at scale.  Because it’s not just about selling. It’s also about finding a new place where all that money can go.

Let’s say you’re China. You export billions of dollars’ worth of goods to the US every month. The payments come in — well, dollars. Now you’re sitting on a giant pile of cash. What do you do with it? You could buy US treasuries. Or US stocks. Or real estate. Or simply keep the dollars as part of your foreign exchange reserves.

But unless the US suddenly becomes a net exporter or starts exporting more than it imports — which hasn’t happened in decades — dollars will keep flowing to countries like China. And those dollars need to go somewhere. That means foreign countries (especially the ones that export a lot to the US) can’t stop investing in US assets. Not unless they’re okay with sitting on mountains of idle cash.

Plus, selling US assets comes with risks too. Let’s say if China dumps too many Treasuries too quickly. It will suddenly oversupply the market and push bond prices down. And this will also lower the value of the bonds it still holds. It loses money either way. 

So even if countries want to reduce their dollar exposure, they can only do it slowly and selectively.

And even then, there’s another challenge — scale. If you’re a country managing billions of dollars in reserves, where do you even move that kind of money? The US bond market can easily absorb that scale. $28 trillion in total market size and over $1 trillion traded daily. But for the gold market, it’s just $20 trillion in total and about $230 billion traded daily. European bonds? Smaller. Japanese bonds? Low returns. Chinese bonds? Not fully open or trusted yet.

There aren’t enough alternatives that are big, safe, and liquid all at once. That’s why investors, even the ones unhappy with the US, can’t fully walk away.

And even if everyone suddenly floods into euros or yen, those currencies get stronger. That makes exports from Europe or Japan more expensive — which hurts their economies. So they aren’t eager to take the dollar’s place either.

So yes, foreign investors are trimming their US exposure. Central banks are loading up on gold. More countries want to trade in local currencies. But this isn’t the end of dollars or US assets. Because the dollar isn’t just a currency but part of a global system. And what we’re seeing isn’t a shift entirely from “America to elsewhere”. It’s from “everything in the US” to “let’s diversify a little.”

And how might this shift affect India, you ask?

Well, as you know, a weaker dollar usually works in our favour. It makes imports like oil cheaper. It could attract more foreign money into Indian stocks and bonds – especially if investors are fleeing US assets. Even the RBI has been preparing for this shift. It's been gradually diversifying its reserves, to derisk from the dollar volatility by steadily buying gold and tweaking its forex portfolio.

But we aren’t completely insulated either. When US bond yields spike, the ripple effects reach us too. Foreign investors often pull money out of India… and that again puts pressure on the rupee. Plus, the US is our top export market. So if its economy slows, our exports do too.

So yeah, India may benefit from a world that’s a little less dollar-centric. But we still have to balance the risks — manage currency swings, keep exports competitive and make sure our own markets remain attractive.

Until then…

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