The surge in reserve growth also calls in into question how diversification by the world's major reserve holders is proceeding at this stage. China may have stepped up its purchases of non-US assets over the past few months but will not be doing so in a destablising fashion. According to Treasury data, China's purchases of Treasurys is now a bit more volatile compared to previous quarters and the pace of buying is clearly declining. However, this does not suggest any rapid move away from the US as a reserve currency in the foreseeable future due to the lack of alternative assets available amongst other potential reserve currencies.

Nevertheless, the main concern of the dollar's creditors remains one currency debasing due to the Fed's asset purchases. Treasury purchases will end soon and it remains to be seen how it would affect net holdings amongst sovereign names. China may have been able to offload some of its current holdings at preferable prices due to the surge in demand during the financial crisis, while the Fed has been a willing buyer on the other side of the trade. However, compared to cumulative holdings these changes are still miniscule and China may be resigned to the fact that it cannot engage in significant diversification of existing assets without causing major disruption.

At present, USDCNY stability and strong reserve growth suggest China is no closer to moving back towards a floating regime anytime soon. Recently released trade numbers are welcome news for the domestic economy, but the result may be further reluctance on the part of authorities to move away from an export-oriented growth model. This is good news for the dollar as it means CNY gains will be closely managed in the future, while other economies with managed regimes will be reluctant to allow appreciation of their own currencies for fear of losing competitiveness. In the long run, the dollar will face secular downside pressures but the pace is likely to be much more measured than what the market is expecting.