10.02.202600:48 Forex Analysis & Reviews: The Dollar is Being Offloaded

Slowly but surely. This is how China is unloading its holdings of US Treasury bonds. This is how EUR/USD is moving upward in response to a leaked news report about recommendations from official Beijing to its banks to limit purchases of Treasuries. China is following in the footsteps of India and Brazil, which are also renouncing everything American. At the same time, the scale of its economy makes traders nervous. Bond yields are rising, and the dollar is falling.

Dynamics of Treasury Holdings in China

China holds US Treasury bonds worth $682.6 billion, the lowest level since 2008. At its peak in 2013, these assets reached $1.32 trillion. Their amount is constantly decreasing. Nevertheless, Belgium, where Beijing has investment accounts, has increased its Treasury holdings fourfold since 2017 to $481 billion.

If China were to dump all US government bonds immediately, it would cause a significant shock to financial markets. Instead, China prefers to sink the United States slowly. Its instructions to banks are intended to limit the growing uncertainty around White House policies. If others follow Beijing, Brasilia, and Delhi, Americans will find it extremely difficult to find buyers for their colossal debt. This threatens default and the loss of the US dollar's status as the main reserve asset. Is it any wonder that EUR/USD is rallying?

According to Bank of America, the long-term outlook for the US dollar remains "bearish." Still, as long as investors are removing phrases like "loss of authority" and "sell America" from their notebooks, the greenback may improve its position. The story with China suggests otherwise. The main currency pair has determined its path. The only remaining question is the rally's speed.

Speculators fully understand this and continue to increase short positions on the American currency. In the week ending February 3, net shorts reached their highest level since July. However, the position is not yet extreme; the USD index has room to fall.

Dynamics of Hedge Fund and Asset Manager Positions on the US Dollar

Will the Fed help or harm the greenback? Further decisions from the central bank will depend on the data. Reports on US employment, inflation, and retail sales will provide the Fed with food for thought. Weakness in the American labor market could open the door to a federal funds rate cut not in June, as currently projected by derivatives, but earlier, in April. If that happens, the shift in timelines will be a reason to buy the main currency pair.

Technically, on the daily chart, EUR/USD had a solid breakout of the important level of 1.1835, which opened the door to long positions. A successful assault on resistance at 1.187 will provide grounds to increase them. Possible scenarios for further developments include a restoration of the upward trend or the formation of a reversal pattern 1-2-3.