Tuesday, February 22, 2005

If You're In A Hole, Keep Digging

Josh asks whether increased central bank diversification out of dollar holdings is "as worrisome as it looks."

It's hard to say, really. The fact that quite a few central banks intend to perhaps slowly increase the proportion of other currencies in their pile of reserves isn't necessarily that big of a deal. At the very least we're probably beginning a period in which an advantage that the US has held for quite some time begins to unravel. Our position as the world's reserve currency gives us a little bonus.

But, the fact is that China and Japan in particular have a real interest in propping up the dollar and treasury prices. A slow move a way from dollar dominance in central bank reserves on the whole isn't such a big deal -- but a decision by China and Japan to stop digging would be.