This week, a frisson passed through Treasury markets when it emerged that China has been selling US government bonds. These sales were not huge — a mere $20.5bn in March — nor were they made with accompanying public threats. But in the current protectionist climate, the news left investors pondering two unnerving questions. Could the current trade war turn into a capital and currency war? And if so, might that undermine the dominance of the US dollar?
The answer to the first question is, “one hopes not”. And to the second, “almost certainly no”.
The reasons for this were neatly laid out at a meeting of central bankers earlier this week in Zurich, organised by the IMF and Swiss National Bank. This started with a paper from Barry Eichengreen, the American economist, outlining a split among academics in the US about the way the dollar has in effect anchored the international monetary system (it accounts for about 60 per cent of foreign exchange reserves, foreign currency liabilities and bank deposits).