mises.org / Frank Shostak / March 14, 2017
After climbing to $1.315 trillion by July 2011, China’s holdings of US Treasuries have been in a downtrend closing at $1.058 trillion by December last year — a fall of 19.5%.
As a percentage of total foreign holdings of US Treasuries, China’s holdings fell from 28.2% in July 2011 to 17.6% by December 2016.
There is a strong consensus view that a sharp fall in China’s holdings of US Treasuries could seriously weaken the US dollar and cause a significant rise in the US interest rate structure. How realistic is this view?
What Determines the Exchange Rate?
Exchange rates appear to be moving in response to so many factors that it makes it almost impossible to ascertain where the rate of exchange is likely to be headed. But, rather than paying attention to this multitude of variables, it is more sensible to focus on the essential variable.
As far as exchange rate determination is concerned, the essential variable is the relative changes in the purchasing power of various monies. It is the relative purchasing power of different countries’ money which sets the underlying rate of exchange.
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