DXY Falls Below 97 After China Urges Gradual Cut in US Treasury Holdings
The US Dollar Index (DXY) remains below the key 97.00 level after statements from China’s State Administration of Foreign Exchange (SAFE) recommending a gradual reduction in US Treasury allocations. The DXY traded in a 96.40–96.85 range amid euro and yen strength. Technicals show a 50-day moving average below the 200-day (a “death cross”) and elevated volumes; speculative funds have increased net short positions according to CFTC data. China holds around $1 trillion in US Treasuries within its $3+ trillion reserves; SAFE urged diversification into other sovereign bonds, gold and SDRs without calling for a rapid sell-off. Analysts expect any reallocation to be slow and measured to avoid market disruption. Immediate market implications include upward pressure on US yields, weaker dollar exchange rates, greater volatility in global bond markets, and increased demand for alternative reserves. Key drivers to watch are Federal Reserve policy, US fiscal deficits, geopolitical developments and adoption of alternative reserve currencies. While a disorderly shift away from the dollar is unlikely, traders should prepare for increased FX and bond volatility as reserve diversification narratives gain traction.
Bearish
China’s public recommendation to gradually reduce the share of US Treasuries in its $3+ trillion reserves is a meaningful strategic signal. As the largest external holder (around $1 trillion), even a measured reallocation can lower marginal demand for Treasuries, putting upward pressure on yields and downward pressure on the dollar. Technical indicators (death cross, elevated volumes) and increased speculative net shorts corroborate trader positioning toward further dollar weakness. For crypto markets, a weaker dollar and higher bond yields historically produce mixed effects: a softer dollar can be positive for dollar-priced crypto demand, but rising yields increase the opportunity cost of holding volatile assets, potentially weighing on risk appetite. Short-term: expect heightened FX and bond volatility, increased hedging, and episodic risk-off moves that could temporarily drain crypto liquidity. Long-term: gradual de-dollarization trends can reduce the dollar’s dominance, potentially supporting broader adoption of alternative assets (including gold and select crypto as store-of-value plays), but only if diversification proceeds steadily without triggering credit-market stress. Overall, the immediate market reaction is bearish for the dollar and likely to increase cross-asset volatility, demanding active risk management from traders.