I refer the readers to my post of 18 February in which I wrote of the risk of America financing its debt by selling T-Notes to foreign governments and financial institutions. Last week South Korean announced it could well diversify its currency holdings away from the US Dollar by buying Australian and Canadian dollars. South Korea is the fourth largest creditor in terms of T-Notes. Result – the dollar dropped.
Now comes the news that Japan might well diversify its holdings. Japan is the number one holder of US T-Notes at $741 billion. Result – the dollar dropped again.
These events underscore the underlying weakness in the US economy and currency due to its enormous indebtedness in the form of T-Notes held abroad. And we are only talking about “diversifying” holdings. What would happen if any of the major holders of T-Notes decided to cash them in? That would do more than cause a drop in the dollar – it would have a seismic impact on the US and global economies.
The countries in question know this, thus they are quietly diversifying to other currencies in order to lessen the blow. Then, they can slowly move their and other economies to safer ground.
For an interesting insight to these scenarios I refer the reader to the following link