August 2, 2018 / 9:35 PM / 4 months ago

Foreign U.S. bond holdings at Fed post biggest rise in 2 years

Aug 2 (Reuters) - Foreign central banks’ holdings of U.S. Treasuries at the Federal Reserve recorded their largest weekly increase in more than two years as the dollar hovered at its strongest level in over a year, Fed data released on Thursday showed.

The greenback has advanced against most currencies amid a trade spat between the United States and China. Traders perceive the dollar as a safer currency if the tensions between the world’s two biggest economies hurt business activity worldwide.

U.S. President Donald Trump was seeking to impose a 25 percent tariff on $200 billion worth of Chinese imports in an effort to extract trade concessions from Beijing, his administration said on Wednesday.

The U.S. central bank’s custody holdings of U.S. government debt securities for overseas central banks totaled $3.060 trillion on August 1, up from $3.036 trillion the week before, according to Fed data.

The $24.06 billion increase marked the biggest weekly rise since the $28.72 billion jump on June 1, 2016.

In March, foreign official ownership of Treasuries at the Fed reached $3.109 trillion, which was the most on record.

On July 19, the dollar reached its highest level against a basket of currencies since July 14, 2017. The dollar index has stayed close to its year-high since.

On Thursday, the Chinese yuan in offshore trading fell to as low as 6.8808 yuan per dollar, its weakest since May 2017. The Korean won and Indonesian rupiah also have fallen against the greenback.

Overseas central banks could buy more Treasuries to help lower the value of their currencies against the dollar, which is seen as a counter measure against U.S. tariffs on their countries’ exports.

On the other hand, they could pare their U.S. Treasuries holdings when the dollar strengthens, to defend their currencies in a bid to stem capital outflows.

During the initial phase of the U.S.-China trade spat, there was speculation among some analysts and traders that China might retaliate against Washington by dumping Treasuries on the open market. There has been no evidence so far China has deployed such a move.

China is the largest foreign holder of U.S. Treasuries, at $1.183 trillion in May, according to Treasury data.

Foreign central banks can keep their U.S. bond holdings outside the Fed.

Reporting by Richard Leong; Editing by Rosalba O'Brien

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