Beijing: China, whose $2.45 trillion in foreign-exchange reserves are the world's largest, is turning bullish on Europe and Japan at the expense of the US.
The Asian nation has been buying "quite a lot" of European bonds, said Yu Yongding, a former adviser to the People's Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2.
Japan's Ministry of Finance said August 9 that China bought 1.73 trillion yen ($20.1 billion) more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.
"Diversification should be a basic principle," Yu said in an interview, adding a "top-level Chinese central banker" told him to convey to European policy makers China's confidence in the region's economy and currency. "We didn't sell any European bonds or assets, instead we bought quite a lot."
China's position may make it harder for the greenback to rebound after falling as much as 10 per cent from this year's peak in June as measured by the trade-weighted Dollar Index.
The Asian nation cut its holdings of US government debt by $72.2 billion, or 7.7 percent, through May from last year's record of $939.9 billion in July 2009, according to the Treasury Department, which releases new data yesterday.
Concern the US economy is faltering was underscored by the Federal Reserve on August 10. Chairman Ben S. Bernanke said the central bank will reinvest principal payments on its mortgage holdings into Treasury notes to prevent money from being drained out of the financial system, its first expansion of measures to spur growth in more than a year.
"The pace of economic recovery is likely to be more modest in the near term than had been anticipated," the Federal Open Market Committee said in a statement after meeting in Washington. "The Committee will keep constant the Federal Reserve's holdings of securities at their current level."
Asian central banks holding some 60 per cent of the world's foreign-exchange reserves are turning away from the dollar. Concerned about weakening US growth and the Treasury's record borrowing, they are switching toward euro assets to safeguard reserves, driving gains in the 16-nation currency. South Korea, Malaysia and India reduced their holdings of Treasuries, US government data show.
Cutting treasuries
The allocations to dollars in official foreign-exchange reserves declined in the first three months of the year, to 61.5 per cent from 62.2 per cent in the final quarter of 2009, the International Monetary Fund said June 30.
The yen's share was 3.1 per cent, up from 3 per cent, The euro's was 27.2 per cent, little changed from 27.3 per cent, even after the currency tumbled 5.7 per cent versus the dollar during the first quarter on speculation that nations including Greece will struggle to rein in their budget deficits.
"Short of concerns of a default, the investor community in terms of big reserve managers will probably be forced to invest in the euro zone," said Dwyfor Evans, a strategist in Hong Kong at State Street Global Markets, part of State Street Corp. which has $19 trillion under custody and $1.8 trillion under management. "They can't be putting all of their eggs in one basket, which is US Treasuries."
The Dollar Index's 5.2 per cent drop in July, the biggest decline in 14 months, failed to dissuade most foreign-exchange forecasters from predicting the greenback will strengthen against the euro and yen by December.
The dollar traded at $1.2798 per euro as of 6:28am in London from $1.2754 in New York last week, when it rose 4.1 per cent. The greenback was at 85.85 yen after falling to 84.73 yen on August 11, the weakest since July 1995.
The US currency will climb to $1.23 per euro by December 31 and to 92 yen, based on median estimates of strategists and economists in Bloomberg surveys. Economists forecast US growth will be 3 per cent this year, compared with 1.2 per cent for the region sharing the euro and 3.4 per cent for Japan. "There's no sign of panic or urgency from the Fed and that supports our view that this is a temporary soft patch and the US economy will fight its way through," said Gareth Berry, a Singapore-based currency strategist at UBS AG, the world's second-largest foreign-exchange trader. UBS forecasts the dollar will rise to $1.15 per euro and 95 yen in three months.
Japan's economy expanded at the slowest pace in three quarters, missing the estimates, the Cabinet Office said yesterday. GDP rose an annualsed 0.4 per cent in the three months ended June 30, compared with the median estimate in a Bloomberg survey for annual growth of 2.3 per cent.
