"With the Fed buying bonds as they do,
It touches raw nerves,
As our dollar reserves
May devalue a trillion or two."
President Hu Jintao of China, in preparation for his state visit to Washington this week, expressed his unease with the course of the US dollar. Responding to questions from the Wall Street Journal and Washington Post, President Hu said that the dollar as the international reserve currency is "a product of the past." He also worried about the impact on China's $2.85 trillion of US currency reserves of the Fed's "quantitative easing" policy of buying treasury bonds to lower interest rates. China fears that such stimulation will export inflation and cheapen its US dollar investments.
Of course the Fed, as steward of the world's largest free-floating currency, does not have the luxury of the more direct forms of manipulation practiced in Beijing. These are a source of irritation to many in the US, as they tend to cheapen Chinese exports and exacerbate the trade imbalance. Should make for some interesting state dinner conversation with President Obama.
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