US Dollar Index Stays Below 97.00 After China’s Strategic Call to Curb Treasury Holdings

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US Dollar Index Stays Below 97.00 After China’s Strategic Call to Curb Treasury Holdings

NEW YORK, March 2025 – The US Dollar Index (DXY), a critical benchmark measuring the dollar’s strength against six major currencies, continues to trade firmly below the psychologically significant 97.00 level. This persistent pressure follows official commentary from Beijing urging a strategic reduction in US Treasury holdings, a move that has sent ripples through global foreign exchange and bond markets. Consequently, traders and central banks worldwide are now closely analyzing the potential long-term implications for currency reserves and international trade dynamics.

US Dollar Index Holds Below Key Threshold

The DXY’s struggle to reclaim the 97.00 mark represents a notable technical and psychological barrier for currency traders. Market data from major financial terminals shows the index oscillating between 96.40 and 96.85 throughout the week. This trading range reflects heightened uncertainty. Furthermore, the euro and Japanese yen have demonstrated relative strength against the greenback during this period. Historical chart analysis indicates that sustained movement below 97.00 often precedes broader periods of dollar weakness, making the current consolidation a focal point for analysts.

Several technical indicators currently signal caution. The 50-day moving average has crossed below the 200-day average, forming what traders call a “death cross.” Meanwhile, trading volume remains elevated, suggesting strong institutional participation. Market sentiment, as measured by the CFTC’s Commitments of Traders report, shows a recent increase in net short positions against the dollar by speculative funds. This data collectively paints a picture of a dollar under scrutiny, with its next directional move heavily dependent on macroeconomic policy signals.

China’s Call for Treasury Diversification

The immediate catalyst for the dollar’s softness stems from policy recommendations issued by China’s State Administration of Foreign Exchange (SAFE). A senior official publicly advocated for a “more diversified and resilient” structure for the nation’s massive foreign exchange reserves, which exceed $3 trillion. While not an outright sell order, the statement explicitly suggested gradually reducing the proportion allocated to US Treasury securities. This recommendation aligns with a longer-term strategic goal, often referred to as the “de-dollarization” of global trade and reserves, pursued by several emerging economies.

China remains the largest foreign holder of US government debt, with holdings fluctuating around $1 trillion. A decisive shift in its allocation strategy would have profound consequences. The table below outlines the potential immediate market impacts:

Experts from the Peterson Institute for International Economics note that any Chinese action would likely be measured to avoid triggering a self-defeating market crash. The process would involve a slow, multi-year reallocation into other sovereign bonds, gold, and Special Drawing Rights (SDRs).

Historical Context and Strategic Motivations

China’s relationship with US debt is deeply intertwined with its export-led economic model. For decades, China recycled its vast trade surpluses with the United States into Treasury bonds, which helped keep US interest rates low and the yuan competitively valued. However, escalating geopolitical tensions and the weaponization of dollar-based financial systems through sanctions have altered this calculus. The current advice reflects a strategic pivot towards greater financial sovereignty and insulation from potential future US policy actions.

A timeline of key events clarifies this evolution:

• 2008-2012: China rapidly accumulates Treasuries, becoming the top foreign holder.
• 2015-2016: China begins modest, periodic sales to support the yuan during capital outflows.
• 2018-2020: Trade wars and initial sanctions discussions prompt internal reviews of reserve security.
• 2022-Present: Russia’s exclusion from SWIFT accelerates global discussions on reducing dollar dependency.
• 2025: Official public recommendation to curb Treasury holdings emerges.

Broader Impacts on Global Currency Markets

The DXY’s movement below 97.00 after China’s statement is symptomatic of a larger shift. Central banks in other major economies, including those in the Eurozone and Japan, are monitoring the situation closely. A weaker dollar can provide temporary relief for emerging markets burdened by dollar-denominated debt, as their repayment costs in local currency terms decrease. Conversely, it can complicate export competitiveness for European and Japanese manufacturers.

Currency volatility indices have spiked in recent sessions. Market participants are actively hedging against further dollar moves. Key factors they are watching include:

• Federal Reserve Policy: The Fed’s interest rate path remains the primary driver of dollar strength.
• US Fiscal Trajectory: Large budget deficits require continued foreign buying of Treasuries.
• Geopolitical Developments: Further sanctions or trade measures could accelerate diversification trends.
• Alternative Reserve Currencies: The uptake of the euro, yen, and yuan in international trade.

Analysts at major investment banks like Goldman Sachs and UBS have published research notes suggesting that while the dollar’s supremacy is not in immediate jeopardy, its “exorbitant privilege” is facing a gradual erosion. The share of US dollars in global central bank reserves has declined from over 70% in 2000 to approximately 58% today, a trend this latest development may reinforce.

Conclusion

The US Dollar Index holding below 97.00 following China’s advisory on Treasury holdings marks a significant moment in international finance. It highlights the growing intersection of geopolitics and global capital flows. While a sudden, disorderly shift away from the dollar remains unlikely, the strategic direction is clear. Markets are now adjusting to a world where reserve management is increasingly viewed through a lens of national security and strategic autonomy, not just yield and liquidity. The trajectory of the US Dollar Index will serve as a crucial barometer for the success and pace of this global financial rebalancing.

FAQs

Q1: What is the US Dollar Index (DXY)?
The US Dollar Index is a measure of the value of the United States dollar relative to a basket of six major world currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. It provides a broad indicator of the dollar’s international strength.

Q2: Why would China reducing Treasury holdings affect the dollar’s value?
The dollar’s value is supported by global demand for it as a reserve currency. A major holder like China reducing its purchases of dollar-denominated assets (like Treasuries) can decrease that demand, potentially putting downward pressure on the dollar’s exchange rate.

Q3: Is China selling all its US Treasuries?
No. The recent statements suggest a strategic, gradual reduction in the *proportion* of its reserves held in US debt, not a fire sale. A rapid sell-off would damage the value of China’s own remaining holdings and destabilize global markets.

Q4: What are the alternatives to US Treasuries for reserve managers?
Alternatives include sovereign bonds from other stable economies (Germany, Japan), gold, IMF Special Drawing Rights (SDRs), and an increased allocation to other major currencies like the euro and, to a lesser extent, the Chinese yuan itself.

Q5: How does a weaker US Dollar Index affect Americans?
It can lead to higher prices for imported goods, contributing to inflation. However, it can also make US exports cheaper and more competitive abroad, potentially boosting manufacturing and agricultural sectors.

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