Faced with Donald Trump's threats to impose new blackmail tariffs on European countries in order to gain possession of Denmark, various avenues are being considered as retaliation, especially commercial ones. But the lever could also be financial: a study by Deutsche Bank sheds light on a ceiling of as much as 8.000 billion dollars of US assets that are in the hands of European countries, but which could be at least partly dismantled, supporting the single currency.
Europe is the United States' largest creditor with $8.000 trillion in assets
Saturday Trump announced A 10% tariff on goods from eight European countries starting February 1, rising to 25% in June unless an agreement is reached to "buy Greenland." Trump made the threat after the countries said they would conduct symbolic NATO military planning exercises in the semi-autonomous Danish territory. European Council President Antonio Costa said in a social media post on Sunday that EU nations are united in supporting Denmark and Greenland and are ready "to defend themselves against any form of coercion."
Discussions are underway to decide what retaliatory moves could be made if the ongoing diplomatic talks do not yield positive results. Europe could strike the United States with 93 billion euros of duties from February 6, or, as suggested by French President Emmanuel Macron, the EU could activate its most powerful trade retaliatory instrument, the so-called Coercion Instrument (Aci) never used before.
But alongside this, Deutsche is secretly suggesting another move of a financial nature. Analysts at the banking giant have observed that Europe is the major creditor of the United States: European countries hold 8.000 billion dollars in US bonds and stocks, almost the doppio compared to rest of the world put together, and they might consider theidea of bringing a part home of that money.
“With the US net international investment position at record negative levels, the mutual interdependence of European and US financial markets has never been higher,” he said. George Saravelos, Deutsche's global head of FX research. “It would be a question of a capitalization weapon, rather than trade flows, which would be far the most destabilizing for the markets, supporting the euro. Developments in recent days could further encourage the dollar's rebalancing."
“We are not so sure that the impact on the euro will be as negative as commonly assumed” adds Saravelos and adds that the new duties imposed by Trump on European countries could also act as a catalyst for more European political cohesion, further suggesting that any negative fallout on the euro against the dollar this week could be short-lived, he said.
Despite this morning the single currency opened lower than the dollar, then recovered ground and stabilized around $1,1622 in the European morning. "The key aspect to monitor in the coming days" is whether the European Union will activate its anti-coercive tool, Saravelos said. "The euro/dollar movement has been relatively contained, as investors are aware that further escalation could ultimately weigh on the USD as well, with the narrative “Sell America” “still lurking in the background,” said Kristoffer Kjær Lomholt, co-head of fixed income and FX research at Danske Bank.
