China dumping dollar? Maybe, but there's another possibility

There are two distinct possibilities at this juncture:

China - fearing the U.S.'s long term -- and more critically, short-term -- inability to ever repay it's debt, begins a strategic plan to dump the dollar and stop buying U.S. debt.

The second scenario: China uses it's current hold on U.S. debt as leverage against U.S. policies it doesn't agree with, including our military's involvement in eastern Asian affairs.

The reality seems a mix of both scenarios. It's been pointed out that China has been a shallow buyer of U.S. treasuries. The reasons are obvious: We are clearly on a path to devalue our currency, under the thought that the Fed can actually control the money supply at the right moment to prevent catastrophic inflation.

Numerous reports have appeared in the media citing various Chinese officials
who claim or hint at government plans to reduce its holdings of U.S. Treasury
securities for economic reasons. For example, on September 29, 2007, the Chinese
government officially launched the state-owned China Investment Corporation,
which Chinese officials state was created to better manage its foreign exchange
reserves. It reportedly will initially manage over $200 billion of China’s reserves,
making it one of the world’s largest sovereign wealth funds. Some contend the
creation of this entity could signal Chinese plans to diversify away from relatively
low-yielding assets, such as Treasury securities, and perhaps dollar denominated
assets in general.22 On November 7, 2007, Cheng Siwei, the vice chairman of the
Chinese National People’s Congress, reportedly made remarks that the Chinese
government “will favor stronger currencies over weaker ones, and will readjust
accordingly.” The media claimed that his remarks were a major factor in sparking a
sharp decline of the dollar against the euro in international currency markets that
day.

The report is a little more optimistic about China's decision. Doing so would also hurt its economy.

There is one wild card that this report doesn't address, but I think may be more likely.

Japan.

We all hear how much U.S. debt is held by China, how voracious an appetite that country had leading up to this financial meltdown. What has not been mentioned is just how much Japan holds -- nearly 2x the amount of China. That country has been quietly buying treasury bonds and investing in the dollar quite a while, and its holdings have been stabilizing as we print money in proportions not seen since Germany pre-WWII.

There's been no buzz on this since Japan is seen as a staunch ally of the U.S. So far, this may be remote, but I believe there is a greater threat to the dollar of Japan dumping it.

Currently that country has voted in sweeping political change to combat rising unemployment and homelessness for the first time in modern Japan. We may have the economic flu, but Japan is on life support.

How long before that country begins to liquidate our currency to silo into more stable debt instruments? Even small movements in Japanese holdings will have profound effects on our dollar pricing and our economy.

The UK is the third largest holder of American debt, and as things also look black in the UK who is to say that some of this debt might be off loaded before the Chinese and Japanese jump ship.