The dollar nursed its losses against the yen on Thursday, having suffered its biggest one-day drop in almost eight months following a report that China was ready to slow or halt its purchases of U.S. Treasuries. Yields on 10-year U.S. Treasurys rose for a fifth day, touching the highest since March.
At the end of October 2017, China held $1.19 trillion of U.S. Treasuries, the most of any foreign country, according to the latest data from the U.S. Treasury and Federal Reserve Board. It isn't clear whether the officials' recommendations have been adopted.
The fear is that, at a time when the Federal Reserve has started reducing its holdings of USA debt (coupled with news that Japan is reducing its Treasury purchases and China might follow suit), there will be less demand for US debt.
Gold futures surged on Wednesday, hitting its highest level since September 15 as investors reacted to a plunge in the U.S. Dollar.
China uses its holdings of foreign currency bonds to keep its currency at the rate where it wants it, and given this desire for stability, there might not be much room for manoeuvre on the composition of its reserves.
A few reasons gold couldn't sustain its breakout rally on Wednesday were investors didn't want to take on new positions ahead of today's USA producer inflation report, the stock market sitting near record highs and rising Treasury yields.
Trade tensions between China and the United States are expected to rise as President Donald Trump weighs potential trade actions against Beijing, including broad tariffs or quotas on steel and aluminium and an investigation into Chinese intellectual property misappropriation. Japan was second with US bond holdings worth $1.09 trillion.
Bond veteran Bill Gross says a bear market has begun. For China, trade tensions with the USA may also provide a reason to slow or stop buying American debt.
The world's second largest economy has long invested heavily in U.S. bonds as a way of controlling the value of its own currency the yuan.
Officials at China's State Administration of Foreign Exchange also recognized that injecting politics into Treasury purchases could backfire, causing a price decline that could damage the value of the country's own holdings, the analysts said.
Some investors said that the market could take the China news in stride, considering the nation's net purchases of Treasurys have already slowed "significantly".
Yields were already climbing this week amid expectations the improving global economy will boost inflation pressures round the world, just as major central banks scale back their asset purchases. The U.S.is scheduled to reopen $20 billion of 10-year debt Wednesday, followed by $12 billion of 30-year bonds Thursday. The yuan gained around 6.8 percent versus the dollar previous year.