KerPlunk?

http://money.cnn.com/2005/07/21/markets
/bondcenter/bonds.reut/index.htm

"While a China revaluation at 2.1 percent was modest, the market's concern clearly reflected the critical role foreign central banks have played in keeping long-term rates low even as the Federal Reserve has raised short-term rate."

China has revalued its currently by a small margin of 2.1%, but more significantly it has stated that is will no longer peg its currency to the US dollar. Rather it will adopt a trade weighted basket of currencies to manage the Yuan against. I note also that Malaysia quickly followed China's example.

Now does this mean that China will rebalance its foreign currency reserves to reflect the Yuan's trade weighted basket?

http://www.forbes.com/home/feeds/ap/2005/03/11/ap1878397.html

"China's has the world's second-largest foreign currency reserves after Japan, with the equivalent of nearly US$610 billion (euro470 billion) at the end of 2004. That rose by US$209.9 billion (euro161.5 billion) last year, driven in part by a surging trade surplus.

Even as the reserves grew, the share of dollar assets held by China's central bank fell to 76 percent, down from 82 percent in 2003, Lehman Brothers said."

A significant reduction in the relative shareholding of US dollar reserves by asian reserve banks could precipitate a decline in the US dollar, or more precisely a crash. It will certainly be interesting to see how this plays out over the next few months.