Asia split over China’s “war of nerves” with U.S.
Asian policymakers are preoccupied with China’s “war of nerves” over the U.S. dollar’s global status rather than the impact of the Fed’s debt buying on their vast dollar-linked savings, officials told Reuters.
The Federal Reserve’s decision earlier this month to buy more than $1 trillion in long-term U.S. debt to push down rates drove the dollar sharply lower, though Asian officials said the actions were unsurprising given how much private lending has slowed.
Much more unanticipated was China’s unusually aggressive push last week to replace the U.S. dollar as the top central bank reserve currency, they said.
Officials with direct knowledge of reserve management issues in Japan, India and South Korea, which together hold some $1.5 trillion in currency reserves, were skeptical that such an overhaul of the global monetary system could happen soon.
They acknowledge, however, that the sheer size of their dollar holdings made their substantial reduction problematic.
In contrast, Malaysia and Indonesia, which have smaller reserve stockpiles and hold a combined $145 billion, were already gearing for a change in the reserve currency regime.
China, with the world’s largest reserves at $2 trillion — the bulk of it widely believed to be in U.S. Treasuries — demonstrated last week that it is confident about using economic might to protect its interests, Asian officials said cash loans in 1 hour.
NO DRASTIC SHIFT
“China is engaging in a war of nerves with the U.S. as it is trying to see what move the new U.S. administration makes, and the recent comments have been made in that context,” said a Japanese government official.
“But it won’t make a drastic shift, given its massive holdings of U.S. Treasuries,” the official, who was not authorized to speak to the media, said.
It will try, however, to protect the value of its dollar holdings by reminding the United States about the need to preserve fiscal health, the official said.
Japan has $1 trillion in foreign exchange reserves, the world’s second-largest stockpile. Nearly two thirds of the total were invested in U.S. Treasuries, according to January data, and Tokyo has said it will continue to invest the majority of its reserves in U.S. government debt.
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SYMPATHETIC BUT PRACTICAL
A senior financial official in South Korea, which has $201 billion in foreign reserves, sympathized with Beijing’s concerns about the dollar’s value.