The U.S. dollar is on our minds these days because it is weak and getting weaker. We hear reports that Chinese officials are actively cautioning, scolding and remonstrating the U.S. on its profligate ways because China has a few trillion in reserves, much of it invested in dollar-denominated securities.
And, the falling dollar and China’s big stake in dollar-denominated securities raises the question, “Will China dump the dollar?” For investors, I believe a better question is:
Can China really dump the dollar?
In terms of foreign currencies, I believe there are only two other actual currencies — the Euro and the Japanese Yen — that China could look to other than the dollar. China’s financial reserves are big enough that the Chinese government has to have its foreign assets denominated in a very large, liquid currency. And, there are not too many of those around other than the U.S. dollar, the Euro and the Yen. For a variety of historical and cultural reasons, I doubt if the Chinese would seriously entertain putting most of their foreign currency and foreign assets holdings in the Japanese Yen, so the currency choice is between the dollar and the Euro.
Image source: Wikipedia Commons
The Chinese are investing in the Euro, but that is happening in an incremental fashion. As long as the U.S. remains a significant trading partner for China’s exports, the dollar will be a major currency for Chinese central bank activities. There are those who think the Chinese will dump the dollar and buy Euros on a wholesale basis, but that is unlikely.
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