Recently, geopolitical tensions have had a significant impact on the global financial markets. From the Greenland issue to conflicts with Canada and China, it is clear that trade frictions and the reshaping of supply chains will be the biggest variables from 2025 to 2026. However, what is often overlooked is that, no matter how intense these conflicts become, the fundamental structure of the financial system remains surprisingly resilient. Put simply, even adversaries are forced to use the same financial pools.

Looking at the overseas holdings of U.S. Treasuries, the total is $9.4 trillion. Among them, Europe accounts for 33.4%, and Japan is also one of the largest individual countries holding them. This figure indicates that, regardless of how severe political conflicts are, the settlement and collateral systems cannot be destroyed overnight.

As conflicts increase, U.S. dollar assets serve a role similar to cash during wartime. Uncertainty in energy prices, risks of supply chain disruptions, and policies such as sanctions and export controls cause risk premiums to spike sharply. Under these conditions, global funds naturally revert to the liquidity of the U.S. dollar and U.S. Treasuries as collateral. To put it plainly, the greater the chaos, the faster safe-haven assets are sought out.

Europe’s high holdings of U.S. Treasuries are not driven by affection for America. Rather, financial hubs like London, Luxembourg, Dublin, and Brussels function as “passageways” for global capital. The more turmoil there is worldwide, the more mature systems like clearing, repos, and derivatives are needed. These systems are concentrated in Europe. In other words, Europe acts as a conduit, while the U.S. provides the underlying assets. This relationship explains why trade conflicts do not alter the fundamental dynamics.

Japan’s position is passive. Geopolitical conflicts amplify pressure on exchange rates and energy prices, making foreign currency assets necessary as buffers. At the same time, rising risks increase demand for duration assets in life insurance and pension funds. In other words, holding U.S. Treasuries is not a choice for Japan but a systemic necessity. Therefore, even if conflicts intensify, Japan’s official stance remains ambiguous, but on the asset side, it continues to maintain a stable proportion of U.S. dollar assets.

The reduction of U.S. Treasury holdings by China follows the same logic. Escalating conflicts increase risks of freezing assets, sanctions, and payment routes. As a result, China aims to reduce exposure to single counterparties in foreign exchange reserves and increase liquidity. However, this does not mean decoupling. In reality, there are too few assets with the depth and liquidity to replace short-term holdings. Politically, opposition escalates, but financially, all parties remain bound by the same system. Simply put, it’s a relationship of mutual dislike but unavoidable use.

Conflicts accelerate contradictions in fiscal policy, interest rates, and debt. Rising costs of defense spending, industrial subsidies, and domestic supply chain initiatives eventually impact fiscal deficits. As deficits swell and interest rates rise, the interest payments on U.S. debt expand like a black hole. Even in 2026, the U.S. faces extremely high interest costs.

Looking at capital allocation, the so-called “enemies and allies” are very clear on the financial front. The U.S., Europe, and Japan naturally “unite” within the same settlement and collateral systems. Not because they are more aligned, but because they share the same dollar asset pools, custody and clearing networks, and repo markets. As global turmoil increases, this system demands more stable collateral, making U.S. Treasuries akin to standard wartime ammunition.

While China is reducing its holdings, it remains one of the major holders. This fact itself shows that, on the narrative level, opposition escalates, but on the financial front, full-scale confrontation has not occurred. Since there are no assets that can be easily substituted in the short term, foreign exchange reserve management cannot be decided based on emotion. You can dislike the other side, but avoiding their system altogether is extremely difficult. This is the straightforward reality in an era of geopolitical trade friction.