It appears that China is doing its best to keep the dollar from strengthening, employing a strategy of "covert easing." Is this Act One of the US-China divorce Harvard's Niall Ferguson predicted last year, or is this an intervention on China's part to moderate the short covering rally in the dollar, as a way to hedge its exports recovery? Only time will tell; either way, it looks as though China is selling U.S. treasuries.
AP/MSNBC reports China cuts holdings of U.S. Treasuries:
The government said Tuesday that foreign demand for U.S. Treasury securities fell by the largest amount on record in December with China reducing its holdings by $34.2 billion.
The reductions in holdings, if they continue, could force the government to make higher interest payments at a time that it is running record federal deficits.
The Treasury Department reported that foreign holdings of U.S. Treasury securities fell by $53 billion in December, surpassing the previous record of a $44.5 billion drop in April 2009.
On the surface, this is a story that is likely to get politicized, used in Washington, as bait for continuance of QE. Scratching below, there is far more to this than meets the eye, in what amounts to a very sophisticated monetary shell game of keeping the dollar moderately cheap that is being played out between the U.S and China. Keep your eyes on the ball. The agenda belongs to China, the recovery in its export sector, and currency balance in the yuan/dollar pair.
Is China tightening? Not Really.
Source: MSNBC, February 16, 2010.
