Junichiro Koizumi, prime minister of Japan, sent the dollar reeling as he warned  diversification of Japan’s foreign exchange reserves may be "necessary." This announcement comes in the wake of a similar warning issued by South Korea’s Central Bank. The difference being Japan’s dollar reserves, at $840 Billion, more than quadruple those of South Korea. Japan’s finance minister was quick to qualify Koizumi’s comments, saying that the prime minister was referring to diversification of the dollar reserves into different dollar-denominated assets, not into different currencies. However, the damage had already been wrought, as the dollar reached short-term highs against both the Euro and the Yen. The news also sent US treasury yields soaring, as bondholders feared the US might have to offer a higher return to prevent the banks from diversifying. The Financial Times reports:

Although the market remains skeptical of any imminent Japanese diversification, Tony Norfield, global head of foreign exchange strategy at ABN Amro, said: “If there is a political debate about in Japan about what to do with their reserves, that will put the spotlight on the dollar.”

Read More: Koizumi puts markets in a spin