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I'm not really sure how it diminishes ties. We didn't have a separate residence for the Vatican until 1994 and the position has never been an exceedingly important posting, it has largely been a symbolic one. Shifting the residence from one location to another (it is a residence primarily, not an embassy office) Most serious bilateral work done with the Vatican is done directly by the State Department. This seems to be blown dramatically out of proportion, it's just an office move. It isn't even being subsumed, it is going to occupy its own space with its own entrance and section of the compound.
In another country!
Of course it is all about symbolism. You think I give a rat's ass where bureaucrat's process forms?
As I pointed out in subsequent posts, this is only another in a long line of snubs, insults, and back-handedness coming from this administration...
It isn't an isolated incident, it is one for instance in a patterned behavior.