JOHN SNOW, the US Treasury Secretary, denied yesterday that China had America in an economic stranglehold as an announcement by Beijing that it will seek to diversify its vast currency reserves fuelled worries that the dollar will come under heavy pressure this year.

The decision by China’s State Administration of Foreign Exchange (Safe) that it will explore a wider range of ways to invest the country’s $769 billion (£437 billion) of currency reserves — the bulk of which are in dollars — could add to a series of factors exerting downward pressure on the US currency, economists said.

The dollar confounded widespread forecasts last year that it would succumb to a broad-based decline. But with the prospect of an early peak in US interest rates and a slowdown in the American economy already tipped by many to weigh on the currency, analysts said China’s move could only add to risks of a significant sell-off at some point this year.

Jim O’Neill, chief economist at Goldman Sachs, said that he already had a bearish view of the dollar, and Beijing’s decision reinforced that view. He expects a further 9 per cent fall of the dollar against the yuan this year, to 7.34 to the dollar, and a dollar drop of 7 per cent against the euro.

Nick Parsons, of Commerzbank, said that he did not expect the dollar to suffer any immediate impact, but that “over three to six months, we could well look back on this as a very important announcement [by Beijing]”.

Gerard Lyons and Stephen Green, of Standard Chartered, agreed that the decision could prove important. “We believe this is a serious dollar negative,” Mr Green said.

With Beijing having piled up as much as $600 billion of dollar assets, which constitute up to 80 per cent of its foreign reserve holdings, an aggressive move by Beijing to switch into non-US assets could trigger a precipitate drop in America’s currency.

This has raised anxieties that China could use this financial muscle as leverage on Washington. But economists said that China would avoid a big or hasty switch from holding US assets, since a resulting slump in the dollar would cause it to lose money on its huge remaining dollar-based holdings. “It would be a self-inflicted wound,” Mr O’Neill said. He and other analysts said Beijing was likely to move only slowly to diversify its reserves by picking a wider mix of assets. “What is more likely is incremental moves,” he said.

Mr Snow echoed this assessment. “Remember, people who own US assets have an interest in seeing that paper sustain its value,” he said. “China is a large holder . . . If the value of our paper were to fall, they would find they had a large loss of net wealth. It’s not in their interests.”

Beijing’s move on reserves came as Safe also said that it would soon scrap foreign exchange quotas on outflows of investment funds from China.

There was speculation that this could make it easier for Chinese institutions to set-up corporate acquisitions abroad. But analysts said that the main significance of the move could be in easing upward pressures on the yuan and domestic inflationary risks in China generated by the big inflows of speculative investment funds into the country. Allowing greater capital outflows would act as a safety valve that would help to ease these problems.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive