Dollar goes downhill on China reserves opinion report

After the Chinese central bank's official newspaper said today that the country should cut its US dollar holdings and increase the foreign exchange reserves in the euro and the yen, the dollar crashed against these two currencies in Asia.

An opinion piece written today in the Financial News, the official paper of the People's Bank of China (PBOC), sent the dollar crashing to a 14-month low against the euro, while the yen got a marginal boost.

The report sent Asian hedge funds and other short-term players to divest the dollar in favour of the euro and the yen, which made the US dollar drop to $1.5063 against the euro in early morning trade in Tokyo-the lowest level since August 2008 and declined to 91.78 yen from 92.06 yen late Friday.

The opinion piece said that China with $2.27 trillion foreign exchange reserves at the end of September, should control it forex reserves by keeping the US dollar as its main holding but reduce the proportion of dollars and increase its holdings of euros and Japanese yen.

The author of the opinion piece, Zhou Hai, the head of research at the PBOC's Harbin sub-branch in China's northeastern Heilongjiang province wrote that currently, China's foreign exchange reserves should be reasonably based on the US dollar, but China should reduce the proportion of dollars and increase the proportion of the euro and yen.

China has invested a substantial part of its forex reserves in US dollar assets, like the low-yielding US Treasury bonds, but Beijing has tried to diversify its investments to improve its returns in the midst of the financial crisis.