ORLANDO, Florida, June 17 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

A fifth day of war between Israel and Iran pushed oil prices

higher and world stocks lower on Tuesday, as investors also

digested some weaker-than-expected U.S. economic data and looked

ahead to the Federal Reserve's policy decision on Wednesday.

In my column today I look at data that show overseas central

bank holdings of Treasuries and other U.S. assets parked at the

Fed are now the lowest since 2017. By this measure, foreign

central banks are de-dollarizing. More on that below, but first,

a roundup of the main market moves.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. Trump contradicts his spy chief on Iran's nuclear

program

2. Fed policymakers gather amid rising geopolitical

risks,

unclear tariff impact

3. Trump pressure on Fed may be backfiring: Mike

Dolan

4. Emerging market local currency debt could end

decade-long drought as dollar wanes

5. Why is the BOJ slowing its buying of Japanese

government

bonds?

Today's Key Market Moves

* Stocks end in the red, mostly. Main U.S. and European

indices

fall 0.7%-1.1%, but Asia holds up better - China flat, Japan in

the green, MSCI Asia ex-Japan down 0.4%.

* The dollar has its best day in over a month,

rising 0.8%

and rebounding from last week's three-and-a-half-year low. With

bearish positioning and sentiment so stretched, it looks like a

proper snapback has finally occurred.

* Oil leaps more than 4%, with Brent futures well above

$76/bbl

and WTI futures back above $75/bbl.

* Treasury yields fall across the curve, as much as 7 bps at

the

long end which bull flattens the curve. $23 billion auction of

5-year TIPS draws strong demand.

* Silver rises above $37/oz for the first time in over 13

years.

It's up 12% so far this month, pulling away from gold, which is

up 2% in June.

Escalation fuels trepidation

Whatever hope there was on Monday for a de-escalation in the

Iran-Israel conflict was obliterated on Tuesday as the two

countries kept up attacks on each other, and the U.S. sent more

fighter jets to the region and bolstered its forces there.

Investors were further unnerved after President Donald Trump

said on social media that the U.S. has no immediate plans to

"take out (kill!)" Iran's Supreme Leader Ayatollah Ali Khamenei

but Washington's patience is "wearing thin".

Fading prospects of peace triggered a wave of 'risk off'

activity across world markets. Stocks fell across the board, oil

rose, government bond yields fell sharply and the dollar

rediscovered its safe haven appeal to notch its biggest rise in

over a month.

Curiously, gold barely got any lift, perhaps struggling for

renewed momentum so close to its all-time high of $3,500 an

ounce. Instead, silver was the best-performing precious metal,

climbing to a 13-year high above $37 an ounce.

Adding to the caution were U.S. retail sales and industrial

production figures, both of which were weaker than economists

expected, at least at the headline level. If U.S. consumers are

drawing in their horns and factories are feeling the squeeze

even before tariffs hit, growth in the second half of the year

will slow.

The outlook for tariffs, growth and inflation - not to

mention war in the Middle East - will guide the Fed's policy

decision and revised economic projections on Wednesday. It's an

increasingly difficult line for Chair Jerome Powell and his

colleagues to tread.

The Bank of Japan, meanwhile, adopted a more cautious stance

on Tuesday. It left its short-term policy rate on hold at 0.5%,

as expected, and voted to slow the pace of balance sheet rundown

in fiscal year 2026.

With the BOJ's policy rate likely to remain on hold for the

rest of the year, according to market pricing, and the pace of

balance sheet reduction not changing until March, the impact on

Japanese assets in the near term could be limited.

Not that investors will be getting complacent - the

Israel-Iran war and Fed decision on Wednesday will see to that.

Foreign central banks are shrinking U.S. asset exposure

As debate rages around 'de-dollarization' and the world's

appetite for dollar-denominated assets, one major cohort of

overseas investors appears to be quietly backing away from U.S.

securities: central banks.

That's the conclusion to be drawn from the New York Fed's

latest 'custody' data, which shows a steady decline in the value

of Treasuries and other U.S. securities held on behalf of

foreign central banks.

There are many ways to gauge foreign demand for U.S. assets,

and they often send conflicting signals. Moreover, the broadest

and most accurate measures, like U.S. Treasury International

Capital (TIC) or the International Monetary Fund's 'Cofer' FX

reserves data, come with a long lag of two months or more.

The New York Fed custody holdings figures are weekly, which

is as 'real time' as it gets in the world of central bank flows.

These figures last week showed that the value of U.S.

Treasuries held at the New York Fed on behalf of foreign central

banks fell to $2.88 trillion. That's the lowest since January,

and the $17.1 billion decline was also the biggest fall since

January.

Including mortgage-backed bonds, agency debt and other

securities, the total value of foreign central banks' U.S.

custody holdings at the New York Fed last week dropped to $3.22

trillion, the lowest since 2017.

That figure has fallen by around $90 billion since March,

just before President Trump's 'Liberation Day' tariff debacle on

April 2, with more than half of the decline coming from

Treasuries.

If these moves are representative of broader trends, then FX

reserve managers are reducing their exposure to U.S. bonds, as a

share of their overall holdings and in nominal terms too.

MURKY PICTURE

It's not easy to get a firm handle on the exact composition

of central banks' dollar-denominated assets, which are worth

trillions and are spread across multiple sectors, jurisdictions

and continents. This is why different cuts of central bank data

can tell different stories.

For example, the latest TIC data show that foreign holdings

of U.S. Treasuries rose to a record $9.05 trillion in March,

with official sector holdings increasing as well. The official

sector held nearly $4 trillion of bills and bonds, around 45% of

all foreign exposure.

But these figures are nearly three months out of date, and

foreign demand for Treasuries in recent months - in the

secondary market and, more recently, at auction - has been

driven by private sector institutions, not the official sector.

There are large pools of 'hidden' FX reserves too

potentially worth trillions of dollars, held in offshore

accounts, overseen by quasi-official entities like sovereign

wealth funds or, in the case of China, state banks.

Meghan Swiber, director of U.S. rates strategy at Bank of

America, says the fall in custody holdings is a warning sign,

especially as it has been accompanied by a modest decline in

foreigners' usage of the Fed's overnight reverse repo (RRP)

facility.

When Treasuries mature, foreign central banks will often

park the cash at the RRP. But they haven't been doing that

lately, Swiber says, meaning both their Treasury holdings and

overnight cash balances at the Fed are falling.

"We worry about foreign demand going forward," Swiber wrote

on Monday, also pointing out that it's "unusual" for reserve

managers to reduce their U.S. Treasury holdings when the dollar

is weakening. "This flow likely reflects official sector

diversification away from dollar holdings."

The $28.5 trillion Treasury market is deep and liquid, and

central banks remain significant participants in it. They are

cautious and careful by nature, meaning any changes to their

holdings will be gradual.

But the weekly custody data suggest some central banks may

already be getting that ball rolling.

What could move markets tomorrow?

* Israel-Iran conflict

* Indonesia interest rate decision

* Japan Tankan business index (June)

* Japan machinery orders (April)

* Japan trade (May)

* UK inflation (May)

* Euro zone current account (April)

* Euro zone inflation (May, final)

* U.S. weekly jobless claims

* U.S. TIC capital flows (April)

* U.S. Federal Reserve policy decision, revised

economic

projections and Jerome Powell's press conference

* Brazil interest rate decision

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