what happens if Asian central banks start diversifying out of their dollar assets?

Question

I am curious about what would happen to the value of the dollar. Since they would start selling off their dollars, I assume we would then see a fall in the dollar against all currencies, but who would come to the rescue? the Fed?

Answer 1

Let's start with a look at the data:

http://www.bea.gov/bea/newsrelarchive/2006/intinv05.xls

Foreign-owned assets in the United States amount to about $13 trillion; foreign official assets in the United States are about $2 trillion. So foreign central banks, as big as they are, control relatively small assets compared to foreign private concerns.

Now, assuming that Asian central banks do start selling off their dollars and private foreign investors do not pick up the slack, the value of the dollar will indeed drop, which will be a good thing for U.S. exporters and those who compete with imports... No "rescue" would be necessary...

Think back to 1985-87. Back then, the dollar lost about 50% of its value relative to both the yen and the German mark. Did anyone even notice it in the U.S.?