The dollar is under fire in China

The dollar fell slightly early Monday after a Bloomberg scoop revealed that Chinese officials verbally warned domestic banks to limit their U.S. dollar holdings. The move appeared to be an attempt to limit currency risk, rather than a verdict on U.S. government debt in particular. The warning did not appear to apply to Chinese government holdings of USD-denominated assets.

Still, some Chinese banks have begun trimming their exposure in response, Bloomberg reported — in one more difficult bit of news for the weak dollar. Chinese banks held about $298 billion in dollar-denominated bonds as of September, according to China's State Administration of Foreign Exchange.

Here's what to know.

The geopolitical meaning

What does the move mean, boiled down? China's not dumping Treasuries because it thinks the U.S. is carrying greater debt risk, but diversifying because the scale of holdings of anything tied to U.S. policy is starting to feel risky.

Official Chinese holdings have been falling for a decade. The country now holds around $683 billion in Treasuries, down from a 2013 peak and the lowest level since 2008. Once the world's largest creditor to the U.S., China has dropped to third place behind Japan and the U.K. But officials have rarely, if ever, advised domestic banks to decrease their holdings — even unofficially, via whisper campaigns.

And that marks a noticeable shift in the USD's image and reputation, if not in official Chinese policy. For decades, U.S. Treasuries were regarded as the default “safe” asset—stable and boring, hence "safe." Now China, and increasingly other major holders, appear to be asking whether the dollar is still to be presumed a riskless asset.

A shift in perception of the USD

What could be making the USD more volatile, or perceptibly less “safe”? Headline reasons include President Donald Trump’s comfort with a weaker dollar, his threats against the Federal Reserve's independence, and his changeable tariff policy and willingness to wage trade wars, all of which can cause currency swings.

Chinese authorities may not be framing their guidance to banks in clear political terms, or even going on the record with their guidance. Whether or not that matters to the rest of the world is unclear. With the USD already weak, any increase in perceived risk — such as Chinese banks’ diversification into other holdings — can affect markets, further weakening the dollar.