“We will favor stronger currencies over weaker ones, and will readjust accordingly,”Cheng Siwei, Vice chairman of the standing committee o the National People’s Congress.
“The dollar is losing its status as the world currency,” Xu Jian central bank vice director
While they did not state that they are moving money out of the dollar or whether there is a specific target for dollar holdings, the message is clear. China does not want to hold dollars in their portfolio. Of course, given the size of their positions, they cannot sell their holdings. The impact would be too great and the euro may not be the best alternative. Nevertheless, any cut in the Chinese dollar holdings will have an impact.
Portfolio rebalancing for strategic reasons will drive the dollar lower even if economists suggest that the dollar is currently oversold. This is a classic price pressure liquidity effect. The declining dollar trend will not change until there is evidence for a more stable dollar. That evidence is unlikely until the uncertainty concerning credit issues in the US are resolved. The additional problem is that carry trades do not favor the dollar as US interest rates decline. No change in this trend.
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