Foreign Central Banks Sell Treasuries as U.S. Dollar Continues to Rise

By the Curmudgeon with Victor Sperandeo

Foreign Banks Dump U.S. Treasuries:

The Financial Times reports that foreign central banks have reduced their U.S. Treasury holdings to the lowest level since 2012, reflecting reserve diversification, foreign exchange (FX) intervention, and balance-of-payments pressures tied to higher energy prices.

“The foreign official sector is selling Treasuries,” said Meghan Swiber, a U.S. rates strategist at Bank of America.

Official custodial holdings at the New York Fed fell by $82 billion since February 25^th to $2.7 trillion, according to Fed data, as the Iran war and the closure of the Strait of Hormuz lifted oil prices and strengthened the dollar. Other sources say that foreign central banks have sold over $90 billion in US Treasuries over a five-week period ending around April 1, 2026.

The move comes as surging energy costs pressure oil-importing economies. Elevated energy prices have strained the balance sheets of oil-importing economies, compelling many to liquidate U.S. government securities to stabilize domestic currencies and meet external funding needs. Concurrently, several monetary authorities have intervened in foreign exchange markets to support their local currencies — actions that typically require selling U.S. dollar reserves, further contributing to the decline in Treasury custodial holdings.

Brad Setser, a senior fellow at the Council on Foreign Relations, who studies foreign holdings of Treasuries, said oil importers such as Turkey, India and Thailand are probably among those selling Treasuries as they pay higher prices for oil, which is denominated in dollars.

Analysts also noted that some Treasury holdings might have been moved to other custodians besides the New York Fed, rather than having been sold outright. But the sales recorded in the Fed data were still notable, particularly since the Treasury market had roughly tripled in size since 2012, when the Fed last recorded this level of selling, Swiber said.

Foreign official holdings of Treasuries held at the Fed have declined in recent years, as managers of foreign currency reserves have diversified away from dollars. That has made foreign private investors an increasingly important part of the market.

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U.S. Dollar Strength Continues:

Meanwhile, the U.S. dollar has been rising due to higher energy prices, safe-haven demand, and the fact that FX intervention often involves selling local currency against dollars rather than selling dollars themselves. The DXY is up 2.44% from February 27^th (1 day before the Iran war started) to April 3^rd(97.65 to 100.03).

Higher oil prices (which are denominated in U.S. dollars) tend to widen the import bill for energy-dependent economies, which can pressure their trade balances and currencies. That often requires them to exchange their local currencies into dollars to pay for imported oil.

Also, investors flee to the U.S. dollar, perceiving it as a “safe haven” when markets are pricing geopolitical risk and inflation into their forecasts.

Therefore, a decline in foreign holdings of Treasuries can coexist with a stronger U.S. dollar when the dominant market force is risk aversion plus energy-driven inflation pressures.

According to Hedgeye, the U.S. dollar carries a -0.84 inverse intermediate TREND correlation to SPX and a +0.94 positive correlation to Brent Oil. Their CPI Nowcast has re-accelerated above 4% by Q4-2026, implying U.S. interest rates will stay "higher for longer."

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Victor’s Comments:

The U.S.–Iran war has upended global hedging and reserve management dynamics across major oil-exporting nations bordering the Persian Gulf. Typically, producers in Gulf nations (Bahrain, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) hedge their oil price exposure by shorting crude futures against forward physical sales until delivery. Once the physical oil is delivered, they receive payment in U.S. dollars, cover their short oil futures positions, and recycle the proceeds into reserve assets—mostly U.S. Treasuries or gold.

Now, with shipments through the Strait of Hormuz disrupted, those same producers are unable to complete delivery, forcing them to raise liquidity by liquidating reserves. The immediate source of funds is short-term U.S. paper—T-bills—followed by sales across the Treasury curve from 2-year to 30-year maturities.

As liquidity pressures deepen, selling expands to U.S. large-cap equities, particularly the Dow 30 and the MAGNIFICENT 7 stocks that dominate global portfolios. Precious metals are also being liquidated, with gold, copper, platinum, and palladium all showing synchronized technical breakdowns that mirror each other. This suggests that “gold being sold for margin calls” is a pretext; the real driver is systemic liquidity stress.

European markets add further strain. Most EU economies remain structurally weak following the loss of Russian energy imports. France is an exception because it has nuclear energy which is the leading source of electricity in the country, but it suffers from macro imbalances like excessive government spending and debt.

The Eurozone, already under dollar shortage stress, must now compete with Japan and South and East Asian nations for dollar funding to purchase emergency oil supplies. That underscores the strategic vulnerability created by overreliance on renewable energy sources (solar and wind), which can be used at the margin for energy needs, but is very undependable.

-->The lesson learned here is that nations must be self-sufficient in their basic food and energy needs. They also must hold reserves in different energy resources as well as dollars.

Victor’s Conclusions:

Dislocations between futures and physical oil prices have widened significantly—spot barrels of oil are trading at significant premiums to futures contracts for WTI crude.

Market participants increasingly suspect official intervention, with the U.S. likely selling crude oil futures to keep the price down and prevent runaway inflation expectations. While unconfirmed by Treasury officials, price action strongly implies coordinated futures market activity designed to contain the geopolitical and inflationary fallout.

End Quote:

Countries must resist the urge to hoard oil and fuel during the energy crisis triggered by the US-Israeli war on Iran, the head of the International Energy Agency has warned, with supplies expected to dwindle further if the Strait of Hormuz remains closed.

“I urge all countries not to impose bans or restrictions on exports,” Fatih Birol told the FT. “It is the worst time when you look at the global oil markets. Their trade partners, their allies and their neighbors will suffer as a result.”

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Wishing you success, good health and good luck. Till next time…..

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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