The Bank of England sees a threat to the soundness of the banking system in the dollar plunge and sliding demand for U.S. assets, it says in its semi-annual Financial Stability Review.

The bank says in the statement that events like sales of US Treasury notes or China’s liberalization of its exchange rate policy might cause ``potentially abrupt movements in currency and interest rate markets.’’

``In the present benign environment, there is a possibility that lenders, borrowers and investors may be inclined to under- estimate long-run vulnerabilities and take on too much risk,’’ is the opinion of Andrew Large, the Banks of England’s deputy governor for financial stability.

The apprehension is grounded in the perception that a sharp decline in the Asian purchases of the US Treasuries would make it extremely challenging for the US government to bridge the widening gap in the budget as well as soaring current account deficit. To calm investors’ fears, China who is the world’s second-largest holder of U.S. Treasuries announced December 10 that it does not plan any ``significant’’ cuts in the amounts of Treasuries it holds.

The Bank of England noted in its report ``little sign’’ of serious danger to the stability of the financial system emerging since June when it released its previous update, as major British and international banks ``remain robust.’’ Still, the risk to one or more banks may come from the swift decline in the value of the dollar in the last six months.