Wall Street spooked by US-China trade tension

USD/JPY: Bank of Japan's Yield Curve Control Could Weigh

The U.S. dollar fell to a more than six-week low against the Japanese yen and weakened against a basket of major currencies on Wednesday after a report that China was ready to slow or halt its U.S. Treasury purchases.

Last night United States treasury 10-year yields jumped 4 points to 2.59 per cent, before reversing following an unconfirmed Bloomberg report that China was considering slowing or halting its purchases of United States treasury bonds.

The 10-year yield moved above 2.5 percent earlier Tuesday before paring its gain, and then resumed its upward shift in US trading hours, making fresh highs.

There are many reasons why China's holdings of US Treasuries might shrink in the years ahead, although none of these are connected to Wednesday's reports.

After all its not a zero sum game and China would harm itself as much as the USA if they went on a buyers strike, and overnight these reports were denied by government sources in Beijing, as SAFE, China's State Administration for Foreign Exchange saying, to coin a "Trumpism" that they were probably "fake news".

Bloomberg News did not immediately comment on the foreign exchange regulator's statement.

The report triggered a volatile response in the U.S. Treasury market with U.S. 10-year Treasury yields spiking to a 10-month high.

"This change of dynamic suggests we may be in the midst of a regime change in the market where the dollar actually falls as USA yields rise on fears of deficit expansion and debasement of the currency", said.

The regulator added that forex reserves management agencies are responsible investors in worldwide financial markets.

"Would the Chinese risk losing their investments in the US market to make a political statement, particularly when their holdings are most likely targeted for broader investments in the USA?" says Quincy Krosby, chief market strategist at Prudential Financial.

This week's bond wobble comes as President Donald Trump looks to balance its huge trade surplus with China, and as Washington loses patience with Beijing over its handling of the North Korea nuclear crisis.

Then, this morning, we get word that yesterday's report - the report that caused all the hand-wringing - was labeled "fake news" by the Chinese.

"We've noticed recently that protectionist voices have been rising in the US", China's Ministry of Commerce spokesman Gao Feng said at a regular news briefing. With concerns starting to rise about a rise in inflation due to the recent strength in oil prices it is understandable that bond markets might be nervous if a normally large buyer of U.S. treasuries either stops buying them or even starts to sell large amounts. Asian stocks were mixed, with benchmarks in Tokyo showing both gains and losses, South Korean and Australian shares weaker and Hong Kong equities higher.

The dollar posted its biggest one-day drop in almost eight months against the Japanese Yen. Last year, he called Federal Reserve Chair Janet Yellen a "modern day Goldilocks" and referred to quantitative easing as "financial methadone". The holdings increased by 6.6% from a year earlier, but were down from a 12-month peak of $1.2 trillion in August.

China had $1.19 trillion in Treasuries as of October 2017, data from the Treasury Department show.

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