Please explain...

So, if I am understanding some of the current economic issues correctly, wouldn't reducing the federal deficit reduce the available supply of low-risk, dollar-denominated assets for foreign central banks to invest in? If that is the case, then won't those banks have to make one of three choices?

1. Cease their currency intervention as there is no place to invest the dollars they would bring in, which would allow exchange rates to resume fluctuating causing the dollar to decline further against Asian currencies but also causing the Chinese renmibi to appreciate relative to other Asian currencies
2. Continue intervening in the currency markets, but bid up the cost of treasury and agency securities, putting downward pressure on interest rates (incidentally, if they purchased short-term bonds, wouldn't the Fed then need to sell bonds from their portfolio which would reduce the monetary supply and, according to Milton Friedman, leading to a recession?)
3. Continue intervening in the currency markets and invest the proceeds in the corporate debt and equity markets (so, finally getting into the realm of productive investments)