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 The yen may strengthen ``a lot because the market is not positioned for this right now,'' said Daniel Tenengauzer, senior currency strategist at Lehman Brothers Holdings Inc. in New York. The market didn't have ``long-yen positions,'' and wasn't expecting this, he said. A long position is a bet on a gain in price.

 China's announcement spurred a sell-off in U.S. Treasury securities, amid speculation that the country will reduce its purchases. China is the second-biggest foreign holder of Treasuries, with more that $243 billion at the end of May, according to the Treasury Department.

The dollar fell as low as $1.2260 against the euro after China's announcement. Theo Darsinos, a fixed-income strategist at Deutsche Bank in London, said ``this could be a buying opportunity on European bonds'' as Treasuries drop. The yield on the benchmark 10-year Treasury note rose more than 6 basis points, or 0.06 percentage point, to 4.22 percent.

A decade ago, before the world financial crisis of 1997-1998, capital movements seemed to fit the historic pattern, as funds flowed from Japan and Western nations to "emerging markets" in Asia and Latin America. But these days things are running in reverse: capital is flowing out of emerging markets, especially China, and into the United States.

This uphill flow isn't the result of private-sector decisions; it's the result of official policy. To keep China's currency from rising, the Chinese government has been buying up huge quantities of dollars and investing the proceeds in U.S. bonds.

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An end to China's dollar-buying spree would lead to a sharp rise in the value of the yuan. It would probably also lead to a sharp fall in the value of the dollar relative to other major currencies, like the yen and the euro, which the Chinese haven't been buying on the same scale. This would help U.S. manufacturers by raising their competitors' costs.

But if the Chinese stopped buying all those U.S. bonds, interest rates would rise. This would be bad news for housing - maybe very bad news, if the interest rate rise burst the bubble.

[...]

Right now America is a superpower living on credit - something I don't think has happened since Philip II ruled Spain. What will happen to our stature if and when China takes away our credit card?