China Favors European Debt Over US

Apparently, China is more confident in Europe than the United States, with regards to respective debt situations.

For the first four months of 2011, China appears to have purchased more European debt than U.S. dollar assets, according to Market Watch. Is China more concerned with the fiscal situation in the United States than in Europe?

The actions on the part of the Chinese might be interpreted as a powerful warning. China is clearly diversifying away from the U.S. dollar. Perhaps the U.S. dollar will cease to be a safe-haven asset in the future?

Still, it is worth noting that for the first four months of the year, activity in Greece was relatively subdued. It was not until May that tensions truly began to spillover. Additionally, the Chinese did not diversify away from total U.S. dollar assets, instead shifting only at the margin.

In late May, Nassim Taleb—noted financial commentator and author of The Black Swan—characterized the debt situation in the U.S. as being "worse than Greece's." The actions of the Chinese might indicate that they are of similar mind.

For now, the safe-haven dollar play appears to be intact. Over the past few weeks, when negative news about Greece was released, the U.S. dollar index tended to rally, and when the news favored a resolution to the Greek crisis, the U.S. dollar index tended to fall.

With China shifting away from the U.S. dollar, will that trade continue to hold?

Action Items

Bullish: Traders who believe that China's actions may foreshadow U.S. dollar weakness might want to consider the following trades:

• Buy SPDR Gold Trust (NYSE: GLD) in a long play on gold. The yellow metal has been rallying as the dollar has declined over the past year. If the dollar continues to weaken, gold and GLD may benefit.
• Short Power Shares DB US Dollar Bullish Index (NYSE: UUP) in a pure short-dollar play. UUP attempts to return a value corresponding to the performance of the U.S. dollar and may do poorly if the U.S. dollar depreciates.

Bearish: Traders who believe that China's purchases are not important in the near-term may consider taking positions in the following:

• iShares Lehman Aggregate Bond (NYSE: AGG) is a long play on U.S. bonds. If traders are running to dollar assets, AGG may do well.
• United States Short Oil Fund (NYSE: DNO) is a short play on oil. Crude oil, priced in dollars, has appeared to move in price with the value of the U.S. dollar. If the dollar is appreciating, oil may decline in price.

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