Could China or Japan Re-Think Investing into Dollars?

Today, Wall Street took a tumble. Dow Jones Industrial Average was down 1.3%, falling 158.46 points to 12,121.71. S&P 500 fell 1.36% and the NASDAQ was down about 2.21%.

The decline in stocks followed comments Friday by a Chinese central banker, who expressed concern about the possibility of a depreciating dollar.

"The exchange rate of the U.S. dollar, which is the major reserve currency, is going lower, increasing the depreciation risk for East Asian reserve assets," according to an academic paper by Wu Xiaoling, deputy governor of the People's Bank of China.

The dollar has not been doing well against the euro (around 1.31) and the sterling pound (1.93). For the Euro, we are almost at a 20-month low.

Wu's comments follow a Nov. 9 statement by Zhou Xiaochuan, the central bank governor of China, who said his country plans to diversify its assets, likely away from the dollar.

The composition of China's $1 trillion of currency reserves remains unclear, but many speculate that at least 70% of it is in dollars. In recent months, the country has been buying U.S. Treasury bonds with dollars from its massive trade surplus with America. Were it to throttle back on its purchases--let alone start selling Treasurys--U.S. interest rates could be expected to markedly increase, putting pressure on American housing, indebted consumers and small businesses.

Anaylsts and finance strategists are downplaying these facts, which I think is a mistake.

Forbes - An Overcast Day On Wall Street

Forbes - China Raises Red Flag On Dollar