Forex- Dollar Falls As China Considers Slowing US Bond Purchases

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According to Reuters, citing a statement from China's foreign exchange regulator, The State Administration of Foreign Exchange (SAFE), the report on usa bond purchases "could be based on erroneous information".

Conflicting media reports over the past 24 hours imply China may be considering buying fewer U.S. Treasurys.

The U.S. 10-year yield rose to 2.56 percent on Wednesday, hitting levels not seen since last March. That involved active selling of USA bonds - at the start of 2014 China's US bond holdings stood at $1.3 trillion and by January a year ago were barely $1.0 trillion.

Investors worry that if China purchases fewer Treasuries, the US government will have to find alternative buyers.

China already holds a huge amount of US government debt.

A Bloomberg News report claimed Wednesday that officials in China had recommended to the Peoples Bank of China and other state authorities that they slow down the pace at which they buy US Treasury bonds, or halt buying them altogether.

"It could be an intentional leak to warn the Trump Administration that China has some levers to pull in responding to any punitive protectionist measures on trade", said Aidan Yao, senior emerging Asia economist at AXA Investment Managers Asia.

The dollar temporarily rose above ¥111.80 after a Chinese government source said that the news report about Beijing's US debt purchases may have been based on wrong information. "I don't think that's worked out so poorly for the U.S". The biggest change in Treasury holdings came from the US Federal Reserve, which increased its net holdings by almost US$1 trillion under its quantitative easing program, not to mention a couple of trillion dollars of mortgage-backed securities.

The yield on 30-year bonds fell 2.9 basis points to 2.863%, versus 2.893%, while the rate on the two-year paper was flat at 1.972%.

GOP lawmakers expressed similar confidence.

But why does China hold so much U.S. debt? Charles E. Grassley (R-Iowa).

This week's bond wobble comes as President Donald Trump looks to balance its huge trade surplus with China, and as Washington loses patience with Beijing over its handling of the North Korea nuclear crisis.

SAFE officials noted that "the handling of China's foreign reserves investment in United States bonds is professionally managed according to market activity, on the basis of market conditions and investment needs". "The going to be turning toward any buyer it can find".

With moves across asset classes centered around the US bond market, the USA consumer inflation data due Friday will be closely watched.

In order for bond yields to move higher, bond prices would have to fall as the "coupon" interest payment is fixed at the point when new bonds are issued and can not be changed to compensate for higher (better) base rates.

In other Forex news, the USD/CAD rose as worries of a U.S. NAFTA withdrawal tempered bets that the Bank of Canada will raise interest rates next week.

In that context, any comments from China on USA government debt will get attention - and in this case, Chinese officials may be trying to send a message to Washington about Trump's trade policies, experts said.

Investors are getting anxious about what America's biggest foreign creditor might do next.

"Market reaction to dollar-buying factors has been subdued, while market reactions to dollar-selling, and yen-buying factors, have been more vivid", Murata said.