Dollar bruised by worries over China's stance on USA bonds

Dollar bruised by worries over China's stance on USA bonds

China holds the world's largest foreign-exchange reserves, at US$3.1 trillion, and regularly assesses its strategy for investing them.

The yield on 10-year U.S. Treasury hit a 10-month high, while the dollar slumped against a basket of currencies following the Bloomberg News report.

But some economists noted that China had already eased Treasury holdings and would not be able to more aggressively reduce holdings without hurting its portfolio, given its need for stable and liquid dollar assets.

"The U.S. Treasury market is a deep, robust market within the world and so we are confident that our economy, with the economy strengthening, that it will remain a deep, robust market", Under Secretary for International Affairs David Malpass told a group of reporters in Brussels. China's central bank amasses dollars when the country turns a large trade surplus with countries such as the US and when Chinese authorities manipulate their currency by selling it and buying dollars.

A senior USA official downplayed the impact of possible scaledown of Chinese purchases of Treasuries.

China uses its holdings of foreign currency bonds to keep its currency at the rate where it wants it, and given this desire for stability, there might not be much room for maneuver on the composition of its reserves.

"It's pretty significant. That takes an important buyer out of the market at the same time you're taking the most important buyer out of the market - the U.S. Fed", said Bruce Bittles, chief investment strategists at Robert W. Baird & Co in Sarasota, Florida. That is not an outcome that would appear to be palatable politically or for economic reasons.

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Ten-year German government debt, the benchmark for the euro area, was also on the backfoot, pushing yields higher by seven basis points to 0.54%, versus a 2017 high of 0.60%.

That 10-year yield level Gundlach referred to was a level last seen a day before the Federal Reserve raised interest rates at its March 14-15 policy meeting. China's State Administration of Foreign Exchange didn't immediately reply to a fax seeking comment on the matter.

Major government bond yields extended earlier gains after the report.

Despite Trump's tough rhetoric, little progress has been made on aluminum and steel tariffs.

The US trade deficit with China rose to US$344.4 million in January-November past year from US$319.3 million in the same period in 2016.

The fear is that, at a time when the Federal Reserve has started reducing its holdings of US debt (coupled with news that Japan is reducing its Treasury purchases and China might follow suit), there will be less demand for USA debt. However, Innes said the uncertainty over China's stance could potentially dampen investors' risk appetite, while the dollar would likely face headwinds against the yen due to speculation about the Bank of Japan's future exit from its massive stimulus policy. They are also in demand by banks to meet regulatory requirements relating to liquid asset holdings, and they can be used as collateral to back trades including derivatives positions.

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