Quora Answer: If America & China Went to War, What Would Happen to the Value of the US Dollar?

The following is my answer to a Quora question: “If America and China went to war, what would happen to the value of the US dollar?”

If the US went to war with any country, the value of the US dollar would rise because it is the reserve currency of the world, and a hedge against uncertainty.  Almost all petrochemical contracts are denominated in the US dollar.

The sole exception to this rule is China.  China is the single largest external holder of American Treasury bonds, its sovereign debt.  China had a policy of buying T-bonds to offset the trade imbalance.  This has slowed down with the advent of the trade war with Trump’s America.

War is an expensive business.  The US government is funded by debt.  In the event of a great power conflict, the US would need to sell a lot of bonds.  If China is not buying, who else is going to lend the US the vast sums it needs?

Also, China holds, as of now, an estimated US$1.2 trillion in Treasury bonds.  That is almost 30% of all bonds held outside the US.  Should China decide to dump all that on the market, it would be an economic nuclear bomb that would immediately tang global markets.  China would suffer itself, but in the event of a war, preservation of the nation supersedes preservation of wealth.