Eve here. This post is carefully moving towards this trend of ship and Treasury retention. They conclude that official holders, like the government, are likely to further reduce their interests, but ironically this does not mean the devil of the dollar as a reserve currency, at least in the recent and midterm period.
This post also helps to correct my perception that SEM is becoming more widespread among readers. US investors are dominant holders and remain in existence.
Paola Subach, professor at the University of Political Science and Economics in Bologna, and Paul van den Nod, an associated member of the University of Economics in Amsterdam, Amsterdam. Originally published on Voxeu
The trade war launched by the Trump administration follows a long-term pattern of geoeconomic fragmentation, but it warns all previous experiences. This column looks beyond the trade war, asking if official investors should continue to hold US federal debt to the same extent as before in a more fragmented global economy. As global trade stalls, the risk of this debt exchange rate increases, so the answer is probably no. However, this does not mean the end of the dollar as the world’s reserve currency, unless the economic laxione is on the brink.
For over a decade, Supply Chains and Security has pushed the world economy towards fragmenting the geographical economy in response to continental considerations (Amedolagine et al 2024), and deepening the European single market (Panon et al 2025, Arjona and Revollala 2024).
The trade war launched by the Trump administration fits this long-term trend, but has won all previous expectations (Grzana and Ilezetski 2025) and only losers (Eiffinger 2025). The new status quo is likely to emerge from negotiations (Anil 2025), but the transition will be painful in 2025). Furthermore, loss of profits from diversifying global integration can lead to more macroeconomic volatility (Attinasi and Mancini 2025).
The trade war should be motivated by inequality that could have been the situation of the dollar’s reserve currency (Monteiro and Piermartini 2024). Meanwhile, the US administration has downplayed the benefits of the US Treasury’s safe asset status (Choi etal. 2024, Subacchi and van den nonord 2023). Triff Reveues argues that this loss of financial advantage offsets an unfounded appearance (Eventet and Fritz 2025).
As the global economy is moving towards more geographical fragmentation, we use a dynamic general balance virium model of three country built around the US, Euro region and Chinese style representation to examine what this means to mean global demand for federal debt.
Who holds finances?
The world accumulates large international dollar involvement, primarily invested in the US Treasury (Figure 1). Approximately a quarter of US federal debt (over 120% of US GDP) is produced overseas due to its safe assets status and the dollar has become a sectarian.
Figure 1 Foreign and domestic ownership of US federal debt
Source: Government Commission of the Federal Reserve System.
Figure 2 Foreign holdings of US federal debt by country or jurisdiction
Source: US Treasury Department. The jurisdictions included in this figure are five Reige investors of the US federal debt. The majority of US EU ownership is reported by financial centres, IE Ireland, Luxembourg and Belgium (where Swift and Euroclear are established).
Figure 3 Formal and private foreign ownership of US federal debt
Source: US Treasury Department.
In the past few decades, China and Japan have been the largest holders of such debts (Figure 2). However, weak returns on US debt following the global financial crisis and geopolitical considerations, including sanctions on the repeated Russian dollar, have been reported in China’s other currencies and gold Eicherenen 2023, Laser et al. This affects most developing countries (the board and McCauley 2025), but changes in China’s portfolio are systematic.
EU countries and the UK have picked up Slack so far. The increase in demand for the US Treasury Department is primarily private, but official holdings are stagnant (Figure 3). However, deeper geoeconomic fragmentation spurred by Trump’s aggressive trade policies involves valuation risks for dollar holders. A recent study (Subacchi and Van Den Noord 2025) assesses this risk and briefly describes the results.
Analytical Framework
We have set up to three countries models where international trade can be resolved with currency issued by “currency Hegemon.” The other two countries accumulate foreign exchange reserves by investing in sovereign liabilities issued by Hegemon, which are considered safe and liquid. One of these countries, “traditional country,” allows private investors to hold foreign sovereign debts, while the other is “emerging creditors” – banning this.
At the end of the second journal, all assets and liability positions are rewinded to distinguish between two periods (“short-term drive” and “long-term drive”). Montarypoly does not play an exploit role in determining the overall price level. As a result, actual exchange rate movements are not classified as nominal exchange rates and inflation rate movements. 1
Real interest rates are an important adjustable variable for establishing the optimal combination of home-produced countries and imported countries (concurrent balance).
In a “traditional creditor” country, the accumulation of reserve assets by the private sector is a function of the opportunity cost that holds them. This cost is the SP pred between risk-adjusted yield on domestic sovereign liabilities and losses in the reserve assets of that asset and exchange rate. The latter is because financial hegemon is needed to run the surplus with longer Tern funds by paying off the sovereign obligations of foreigners.
This approach (see also Blanchard et al. 2005) coupled with the Trump administration’s aggressive trade policy reflects geopolitical geopolitical tensions. It contrasts clearly with the assumption that such debts can stand forever, as embedded in the Infinite Time Horizon (Felbermayr etal. 2023) or static (Cheng and Zhang 2012).
Formal investments in Hegemon’s sovereign obligations are treated as exogenous in the model. However, official investors also face opportunity costs for holdings. Although these costs are assumed to have no impact prior to investment, it is still important to computerize computers to assess the economic health of these investments.
Scenario Analysis
The models and shocks are calibrated to loosely reflect the stylized empirical reality. Starting with a symmetrical balance (scenario 0 with no cross-border asset holdings), we generate two scenarios. In scenario 1, the “traditional creditor” and then the “new creditor” invest in the debt of the money hegemon. Hegemon then “consumes” the “consumes” sub of the fiscal space created by running into a larger fiscal deficit. Scenario 2 evaluates the impact of geoeconomic fragmentation on the opportunity costs of holding reserve assets and how costs change that will keep IFase holdings down.
According to the simulation in Scenario 1, demand for reserve assets by creditors leads to an increase in the latter substantial interstrate spread over hegemon and a short-term but weekly long-term outlook for the real exchange rate of reserve currency. Datz comes from Hegemonlon’s wider trade deficits in the short term and a wider surplus in the long term funding foreign debt repayments.
When hegemon sounds loose polypoly, your favorite yields evaporate as the actual exchange rate folds futer over the long term. Exchange rate movements outweigh narrower yield spreads, which further increases the opportunity costs of holding reserve assets for foreign investors.
Scenario 2 evaluates the impact of fragmentation in the geoeconomics. This measures the relative utilities associated with household items in concurrent utility utility functions. Second, we assume that initially by emerging countries, and then in traditional countries, when demand for reserve assets is reduced.
Assuming that the demand for reserve assets by creditors remains unchanged, the real exchange rate (and terms of trade) of financial hegemony over OHER countries must be strengthened in the short term. As a result, despite an increase in real yields on reserve assets, the opportunity costs of holding assets held in both countries increase in balance.
Therefore, county countries will reduce their reserve assets, starting with emerging emergencies. The subsequent real exchange rate is now highly valued while the yields on its reserve assets were rising. This weakens the incentive for further reductions.
The final step assumes that traditional (public and private) investors in the country will follow suit, as they consider the opportunity costs are still higher. The impact of this change on real yields on reserve assets and the evolution of real exchange rates is similar to the previous steps in which emerging creditors reduced their holdings of reserve assets. As a result, the opportunity further reduces Somowhat, making it even less likely to have a full wipeout.
Conclusion
We will examine whether dollar holders will continue to maintain their pose or reduce their exposure to responsibility for fragmentation of the geoeconomics. We show that the cooking of holding less US sovereign debt is being forced because the opportunity costs of holding it increases. However, reducing the accumulation of US sovereign debt in cardinations countries reduces its opportunity costs. Therefore, unless the country gives facts to the geopolitical brink of economic valuation, the collapse of the dominant position of the dollar is unlikely.
See original bibliographic submission
