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China Warning: Dollar Policy Risky

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An article by a senior official of China's State Administration of Foreign Exchange on Tuesday provoked a steep dive in the dollar against the euro and the Swiss franc in European trading. 

The article, posted on the website of the think-tank China Finance 40 Forum, said that excess holdings in U.S. dollars could pose risks to China. 

Reuters reported that Guan Tao, who is the head of the foreign exchange regulator's international payment department, said that if Washington further weakens the dollar, "We must be alert of economic and political risks in excessive holdings of U.S. dollar assets." He continued, "The United States has taken an expansionary fiscal and monetary policy to stimulate economic growth, and the United States may find it hard to resist the policy temptation of weakening the dollar abroad and pushing up inflation at home."

The dollar, already heading downward before Guan’s comments, hit a one-month low against the euro and other currencies, and entered record low territory compared with the Swiss franc.

China Finance 40 Forum is a Beijing-based think-tank of Chinese economists, bankers and officials. Guan’s article was removed from the website at his request, and he later told reporters that the comments reflected only his own opinion.

China, while it has never disclosed its U.S. Treasury investments, has been attempting to diversify away from the dollar. However, with economists unofficial estimates of its holdings in the neighborhood of 70% of its foreign exchange reserves, which reached a record $3.05 trillion in March, that is not an easy task.

Adam Myers, senior foreign exchange strategist at Credit Agricole, was quoted in the report saying, "China has been growing its share of U.S. securities quite aggressively in the past and the threat that they will be selling these holdings has always been there. But this is not a credible threat, as a sell-off will lead to a steepening of the U.S. yield curve, which will hurt the U.S. and the Chinese, who are dependent on the U.S. economy. But I do agree that the dollar is headed lower in the long term."