China’s foreign exchange regulator challenged the report that it might slow or stop purchases of U.S. Treasury debt due to trade tensions with Washington as “fake news”. The USD was down nearly 0.5% to 92.0 on the DXY index.
USA yields jumped broadly with the two-year yield hitting 1.985 percent on Wednesday, the highest level since September 2008.
The timing of this comes before his decision to potentially hit Beijing with aggressive trade sanctions this month, as a remedy for America’s massive trade deficit with China.
Benchmark 10-year notes last fell 10/32 in price to yield 2.5825 percent, from 2.546 percent late on Tuesday.
West Texas oil extended gains from the highest close in more than three years as U.S. industry data signalled crude stockpiles dropped for an eighth week.
Gold rose on Wednesday, hitting its highest in almost four months as the dollar swooned after a report that Chinese officials had recommended slowing or halting purchases of US Treasury securities.
U.S. investors were spooked by a Bloomberg report, based off an anonymous leak, that China may slow down – or even stop – its buying of USA government bonds.
Financial stocks were still the biggest percentage gainers by late afternoon, however, as investors reacted to the Bloomberg report on China, the world’s biggest holder of US Treasuries.
But also a dollar-pegged yuan helps keep down the cost of Chinese exports, allowing them to then flood the market with cheap goods which U.S. consumers go on to buy.
The dollar recouped some of its recent losses on Thursday after China’s regulator dismissed a report that the country could halt its buying of USA treasuries, boosting the greenback following its biggest one-day fall in a month.
It is possible that comments from the unnamed sources cited by Bloomberg and other outlets are connected to an ongoing trade dispute between the United States and China. WTI crude was up 0.7% to $63.40/bbl, another two-year high, on falling oil stockpiles in the U.S.
The other was China may “no longer need to hold as much reserves as before” as the country is likely to further liberalise its capital account in 2018, amid the current level of comfort with its currency movement and capital flow.
If central bank reserves are to be truly diversified, or bare any resemblance to the shape of the global economy, then reserves managers have to keep pace with this trend. However, we believe USA inflation pressures are picking up.
U.S. Treasurys saw a wave of selling as the bond market continued to tumble to begin 2018.
Economists say they expect China to continue to adjust its holdings of US government debt, considered to be the most liquid dollar assets, but few believe dumping US Treasuries is among policy choices to be considered by top leaders.
“This change of dynamic suggests we may be in the midst of a regime change in the market where the dollar actually falls as USA yields rise on fears of deficit expansion and debasement of the currency”, said.
“The flush of money is being met by a flush of supply, and that produces higher rates”, he said, noting that central banks have injected $14 trillion of liquidity into the market over the past five years.