by Calculated Risk on 1/10/2006 02:15:00 PM

It seems that every time there is a discussion of some foreign central bank diversifying away from the dollar, it is promptly denied by the rumored country. These two articles follow that pattern ...

From the WaPo: China Set To Reduce Exposure To Dollar

China has resolved to shift some of its foreign exchange reserves -- now in excess of $800 billion -- away from the U.S. dollar and into other world currencies in a move likely to push down the value of the greenback, a high-level state economist who advises the nation's economic policymakers said in an interview Monday.

As China's manufacturing industries flood the world with cheap goods, the Chinese central bank has invested roughly three-fourths of its growing foreign currency reserves in U.S. Treasury bills and other dollar-denominated assets. The new policy reflects China's fears that too much of its savings is tied up in the dollar, a currency widely expected to drop in value as the U.S. trade and fiscal deficits climb.
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Some economists have long warned that if foreigners lose their appetite for American debt, the dollar would fall, interest rates would rise and the housing boom could burst, sending real estate prices lower.

The comments of the Chinese senior economist, made on the condition of anonymity because the government disciplines those who speak to the press without express authorization, confirmed an analysis in Monday's Shanghai Securities News stating that China is inclined to shift some its savings into other currencies such as the euro and the yen, or into major purchases of commodities such as oil for a long-discussed strategic energy reserve.

And from the AP: China's central bank denies dollar plans

China said Tuesday it has no plans to sell dollars from its $800 billion-plus foreign reserves, rejecting speculation that had jolted financial markets and fed speculation about the possible impact on the U.S. dollar.

"We won't sell off our dollar-denominated assets," a central bank official, Tang Xu, told Dow Jones Newswires.

China's foreign currency regulator said last week its plans for 2006 include "widening the foreign exchange reserves investment scope." That sparked speculation that Beijing might shift some reserves from dollars, the bulk of its holdings, into other currencies.
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Tang, director-general of the central bank's Research Bureau, said foreign reserves were expected to top $800 billion at the end of 2005, up from $769 billion when the last quarterly report was issued in September, according to Dow Jones.

ALSO: see Martin Feldstein's: Uncle Sam’s bonanza might not be all that it seems Note: Dr. Thoma provides excerpts: Martin Feldstein: Capital Inflows Primarily from Foreign Governments, not Private Investors

And Dr. Setser's comments: Martin Feldstein joins the dollar doomsday cult.

This is a key reason of why one of my top economic predictions of the year was that long rates would rise when the Fed starts cutting rates later this year.