Asian Bankers Watching Who Blinks First

The New York Times talks about the ‘prisoner’s dilemma‘ facing Asian bankers as they watch the U.S. dollar continue to fall in value. "

But now with Japan’s huge stake in the dollar losing value, the question is, What will Tokyo do next? The problem for Japan is that it is in so deep that to a large degree it is chained to its American debtor. "Imagine
that tomorrow people hear, ‘Hey, Japan has decided to divert from U.S.
dollars to euros,’ " [Japan Finance Ministry official Masatsugu] Asakawa said. "That would create a hugely
undesirable impact on the U.S. Treasury market, and we have no
intention at all to make an unfortunate impact on the U.S. Treasury
market."

The article notes that "Asian institutions are responsible for holding roughly 40 percent of the American government’s public debt." Barron’s agrees with Marc Faber, however, that the selloff is overdone in the short term.

Our own feeling is that probably bearishness on the dollar is a tad too
rampant at the moment — the foreign-exchange speculators and every hedge
fund on the face of the earth are effectively short — and a rally of some
sort is in the offing. But if there’s anything governments are good at it,
it’s debasing their currencies, so once a rally runs its course, the buck’s
descent isn’t apt to stop here.

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