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China's plan to diversify $1trillion reserves sends the dollar plunging

Currencies / Strategic News Nov 10, 2006 - 06:22 PM GMT

By: Sarah_Jones

Currencies

The statement by the Chinese central bank governor Zhou Xiaochuan on Thursday that 'China has a clear plan to diversify its $1 trillion foreign exchange reserves and is considering various options to do so', sends the dollar reeling in response.

The diversification comment made by Zhou, was in retaliation to Democratic US Senator Schumer an leading US-China trade/currency critic's celebratory comments following the Democrats election victories. Senator Schumer, has been pushing for tariffs on Chinese goods amid charges it artificially keeps an undervalued yuan to make exports cheap. Along with others, Schumer wants a 27.5 percent levy on imports from China


This is seen as a warning shot that China has a large and powerful arsenal should the Democrats go ahead with their agenda of what could happen the dollar should the Chinease dump their holdings of hundreds of billions of of US bonds.

Though in reality a plunging dollar and rising US interest rates would likely hurt the Chinease more, as the US consumer would buy less chinease goods, resulting in a reduction in Chinease growth. Which means that any meaningful shift out of US assets is unlikely to occur, rather the movements are at the margins.

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