This morning, the UK Telegraph published an article titled "China Threatens ‘nuclear option? of dollar sales. This has received more than the usual press because shifts in Chinese Policy are typically announced through government sponsored think tanks or academics. This time however, the warning was given by two government officials which is a reflection of how serious this threat is. With $1.3 trillion in foreign reserves, most of which are held in US dollars, China has what it takes to cripple the US economy.

Selling US treasuries would mean selling US dollars, which may not so bad, but falling bond prices also leads to rising bond yields. At a time when the stability of US economy is hanging by a thread, any further shocks could have widespread consequences - and China knows this. Bond prices and the US dollar have already sold off on the back of the warning. The dollar is trading less than 50 pips away from its record lows against the Euro at the time of publication.