With the dollar plunging and the US Federal Reserve slashing interest rates, markets are on alert for any signs that foreign investors, particularly in Asia, are buying fewer US assets.
But while some private investors may be heading for the exit, analysts say the authorities in Japan and China look set to hold their nerve as the value of their vast dollar reserves declines.
The world's largest economy has long relied on foreign purchases of Treasuries (US government bonds) to finance its huge debt.
With the yield on those bonds now falling as the Fed tries to contain the credit crisis, higher return assets in other countries have become more attractive.
The Fed has now slashed its federal funds rate by 300 basis points from 5.25 percent last September, while the dollar has hit a series of record lows against the euro and the yen.
"Foreign investors bought 80 to 90 percent of total US Treasuries last year," said Akihiro Nishida, senior economist at Mitsubishi UFJ Securities. "When the dollar goes down, investors certainly have an incentive to sell."
While the sale of US assets by individual investors could put extra pressure on the ailing dollar, a potentially bigger risk is that central banks in Asia and elsewhere might sell some of their stacks of greenbacks.
But countries such as Japan and China face a dilemma because if they sell some of their dollar assets they risk driving the value of the US currency -- and their own forex reserves -- even lower. Such a move could also create political frictions with Washington.
"The bottom line is that it would open up a can of worms," said Tim Condon, head of Asia research at ING Barings in Singapore.
Governments "like a quiet life, and they've got a lot of things that are really urgent to solve in China," he said.
China's foreign exchange reserves, the world's largest, hit US$1.53 trillion at the end of last year, around 70 percent of which is believed to be in US currency-denominated assets, particularly US Treasuries.
As part of efforts to diversify and boost returns on its massive foreign currency holdings, China has created a US$200 billion state-controlled investment fund.
But if China suddenly announced it was selling a large chunk of US Treasuries, "the market would find that difficult to absorb," Condon said.
"On the day of the announcement, the dollar would go down sharply and Treasury bond yields would go up sharply," he said.
"Bit by bit they [China] would like to get out of the intervention game. They would like to get to that more diversified bundle of reserve holdings in a way that doesn't disrupt financial markets too much," Condon said.
A reported drop in holdings of US Treasuries by foreign official institutions last August triggered concern that countries including China were dumping US assets.
But since then foreign governments have resumed net purchases of Treasuries, buying a net US$36.10 billion worth in January, with China and Japan both boosting their holdings, US government figures show.
Japan, whose foreign exchange reserves topped US$1 trillion last month, is the largest foreign holder of US paper, sitting atop US$586.9 billion worth in January.
China was close behind with US$492.6 billion, way ahead of No. 3 Britain which held US$160 billion worth.
Both Asian countries are concerned about the weakness of the dollar, but while they may look at diversifying their foreign exchange holdings as they grow, they are unlikely to become outright dollar sellers, analysts said.
"Should one Asian central bank take the lead to sell [dollars] and other Asian central banks follow suit, a sharp decline in the dollar rate will only cause bigger losses in the forex reserves," said Zhang Ming, (
"Asian countries have few options except for dollar assets. The amount of EU and Japan government bonds is very small compared with US Treasuries and their financial markets are less developed than the US," he said.
Nevertheless US statistics show South Korea's Treasury securities holdings fell to US$39.2 billion at the end of last year from US$66.7 billion a year earlier.
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