Why does China's foreign exchange reserve diversification away from US$ hurt our economy?

The 13-nation euro hit a fresh record against the dollar -- rising to $1.4729 -- before falling back. The dollar fell not only against the euro but in Asia following a report that a senior Chinese political figure said China should diversify its $1.43 trillion foreign exchange reserves into the euro and other strong currencies.

Why does China's foreign exchange reserve diversification away from US$ hurt our economy?
Hurt our economy? Whose? US economy or the Europen economies or the Chinese economy?


First, the Chinese talk is pep political talk. It is just a defence against the criticism that Chinese forex reserves being mostly in dollar are falling in value.


Second, to diversify forex reserves, the Chinese will have to sell dollars to buy Euro and other stronger currencies. That would mean further fall in dollar aND RISE IN the stronger currencies. This means immediate part loss in value f Chinese Forx Reserves.


Third, so long as China continues to have huge current account surplus with the US, it will continue to have this problem of accumulating dollars reserves. So, how will China diversify unless Cina greatly reduces it dependence on US for exports?


Fourth, it is the US which will have problem buying so much from China as the economy slows down unless China is able to buy significantly higher US goods/ But what US goods can China buy from US for her poor population?


Fifth, further appreciation of Euro etc viv a vis the dollar may not be liked by these European countries because they lose competitive advantage.


The baisc imbalance created by huge and sustained current account surplus by China and deficit by the US will cost both the countries dearly. This imbalance will have to be corrected by both the economies. US consumers have to cut down on imports from China as the dollar falls, and China has to find markets elsewhere and reduce her exports to the US.
Reply:u r correct. NYSE reacts to shortterm bad effect on both countries.But the imbanced Sino-US trade balance needs to be corrected any way. Report It