While Europe is considering using capital weapons against the US, China is already using them actively. Beijing is urging Chinese banks not to buy US bonds. How does this affect the dollar? Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- A sell-off in Treasuries weakened the US dollar.
- China is reducing its holdings of Treasury bonds.
- The erosion of confidence is hurting the US currency.
- Long positions on the EUR/USD pair formed at 1.1835 can be kept open.
Weekly US Dollar Fundamental Forecast
When Deutsche Bank said that Europe could use capital as a weapon by refusing to buy US securities because of Greenland, it was hard to take it seriously. However, Beijing’s official call for Chinese banks not to buy US Treasury bonds reignited market fears. The greenback fell sharply, and the EUR/USD pair recorded its best daily performance since January 27, the very day Donald Trump spoke warmly about the dollar’s decline.
Monetary policy alone will not be enough while Trump is the US president. For decades, currency rates on Forex were determined by central bank decisions based on incoming data. Donald Trump turned everything upside down. Now it is necessary to take into account factors such as investor confidence in the dollar and all US assets in general. Meanwhile, it has been significantly eroded by the US tariff policy and the risks of the Fed losing its independence.
US Dollar Performance and 10-Year US Treasury Bond Yield
Source: Bloomberg.
While earlier increases in Treasury bond yields signaled growing appeal for US securities, which brought capital into the US and strengthened the dollar, everything changed in 2025–2026. Treasury yields are rising because Brazil, India, and China are selling off their holdings. The latter started doing this a long time ago.
While in 2013 China was the world’s largest holder of US Treasury bonds with reserves of $1.32 trillion, by 2026 it had been overtaken by Japan and the UK. The value of reserves has fallen to $683 billion. Even though their size in Belgium, where China has investment accounts, has grown fourfold since 2017 to $481 billion, the figure remains well below its peak.
US Treasuries Held By China and Belgium
Source: Bloomberg.
At the outset of Donald Trump’s first trade war with Beijing in 2017, Treasury yields rallied, and the US dollar weakened. At the time, similar rumors circulated on Forex about China using its capital as a weapon.
History is repeating itself. Chinese banks, which the authorities are warning against buying US Treasury bonds, hold about $298 billion worth of them. If they start selling US securities, the US dollar could be severely damaged. According to FOMC member Stephen Miran, only a massive collapse of the USD index could accelerate inflation in the United States. Prices are not a problem yet. The Fed can lower rates without a second thought.
Weekly EURUSD Trading Plan
This means that a loss of confidence in the US dollar is a time bomb. Capital outflows from the United States will weaken the greenback just as much as the Fed’s renewed cycle of monetary expansion. Against this backdrop, long positions formed on the EUR/USD pair at 1.1835 can be maintained at least until the release of US employment statistics for January.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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