ORLANDO, Florida, June 23 (Reuters) - With the dollar

poised for its worst first-half performance since 1986, the

selling may seem to be coming from everyone, everywhere, across

every asset class.

To some extent, that's true. Investors globally appear to be

gradually reducing their exposure to dollar-denominated assets,

driving the greenback down to its lowest level against a basket

of major currencies in three and a half years. But some pressure

points are greater than others.

Unsurprisingly, non-U.S. investors are responsible for the

bulk of the selling, with equity-related selling pressure

concentrated among European investors and fixed income-based

selling mostly coming from Asia.

According to Bank of America's FX strategy team, European

"real money" investors - institutions like pension funds and

insurance companies - are the main drivers of the dollar's

selloff in the second quarter, slashing their dollar positioning

to the lowest since 2022 in a matter of weeks.

But the story might not be so straightforward. While

European investors increasing their dollar hedge ratios have

garnered much attention recently, research shows that most of

the dollar's average daily declines in the last few months have

come in Asian trading hours, suggesting Asian holders of U.S.

bonds may also be increasing their dollar hedges.

So which is the bigger drag on the dollar: equity-led

geographic diversification or fixed income selling? And where is

the selling mostly coming from: Europe or Asia?

OVER-EXPOSED

At first glance, one might pin the blame on equities, as

foreign holdings of U.S. stocks are larger than their U.S. debt

assets in nominal terms. But percentage-wise, overseas

investors' footprint in the U.S. fixed income markets is larger.

Foreigners own just over $31 trillion of U.S. securities,

with $17.6 trillion in equities and $13.6 trillion of bond

holdings, according to the Bank for International Settlements.

That represents around 18% of the overall U.S. equity market,

compared with 21% of the U.S. agency and corporate bond market

and a third of the U.S. Treasury market.

Analysts at UBS estimate that euro zone investors account

for 25% of the foreign-owned U.S. equity universe, having loaded

up on U.S. stocks in recent years. This makes the dollar

particularly vulnerable if Wall Street continues to underperform

European and Asian markets, they reckon.

Breaking down these exposures even further, they find that

foreign investors' total net unhedged dollar asset exposure is

$23.5 trillion. Of this, investors in G10 countries hold $13.4

trillion, with $9.3 trillion in equities and $4.1 trillion in

fixed income.

These are vast numbers, and it wouldn't require much of a

switch to trigger large cross-border flows.

UBS calculates that a hypothetical 5% reduction in G10

countries' dollar position would equate to around $670 billion

of dollar selling. Most G10 countries, of course, are in Europe,

so the bulk of that selling would come from there.

PRICE-SENSITIVE

While European investors have mostly been unloading equities

thus far, it's good to remember that the region's investors

significantly increased their exposure to U.S. bonds over the

last decade too, particularly the 2014-2022 years when the

European Central Bank's main interest rates were negative.

UBS analysts estimate euro zone investors bought $3.4

trillion in foreign debt since 2014. So even a modest

rebalancing away from U.S. bonds could have a meaningful impact

on prices.

Ultimately though, Asian investors still appear to wield

more muscle in the U.S. bond market, owning around a third of

foreign-held U.S. Treasuries and agency debt. And that figure is

probably much higher given that euro zone, Caribbean and UK

holdings include assets held on behalf of Asian countries,

notably China.

Up until this point, there has been no wholesale dumping of

U.S. assets, and neither is there likely to be. But it is

notable that U.S. assets are increasingly being held by private

sector investors, who have replaced central banks as the main

buyers of U.S. assets in recent years.

The private sector is typically considered more

price-sensitive than the official sector. That means these

positions may prove less sticky than in the past, especially if

the idea of waning "U.S. exceptionalism" truly takes root.

(The opinions expressed here are those of the author,

a columnist for Reuters)

Enjoying this column? Check out Reuters Open Interest (ROI),

your essential new source for global financial commentary. ROI

delivers thought-provoking, data-driven analysis. Markets are

moving faster than ever. ROI can help you keep up. Follow ROI on

LinkedIn and X.