About those official purchases of the dollar…
If this report by Chris Giles in the Financial Times is any indication, the official central bank purchases of the dollar — the primary means through which the United States has financed its current account deficit in recent years — is going to be tapering off: Central banks are shifting reserves away from the US ...
If this report by Chris Giles in the Financial Times is any indication, the official central bank purchases of the dollar -- the primary means through which the United States has financed its current account deficit in recent years -- is going to be tapering off:
If this report by Chris Giles in the Financial Times is any indication, the official central bank purchases of the dollar — the primary means through which the United States has financed its current account deficit in recent years — is going to be tapering off:
Central banks are shifting reserves away from the US and towards the eurozone in a move that looks set to deepen the Bush administration’s difficulties in financing its ballooning current account deficit. In actions likely to undermine the dollar’s value on currency markets, 70 per cent of central bank reserve managers said they had increased their exposure to the euro over the past two years. The majority thought eurozone money and debt markets were as attractive a destination for investment as the US. The findings emerge from a survey of central bank reserve managers published today and conducted between September and December of last year. About 65 central banks, controlling assets worth $1,700bn, took part and the results showed a marked change in attitude over the past two years. Any rebalancing of central bank reserve portfolios has serious implications for the global financial system as the US has become increasingly dependent on official flows of funds to finance its current account deficit, estimated at $650bn in 2004. At the end of 2003, central banks held 70 per cent of their official reserves in dollar- denominated assets and central bank purchases of US securities had financed more than 80 per cent of the the US current account deficit in 2003…. In a further worrying sign for the greenback, 47 per cent of reserve managers surveyed said they expected the growth of official reserves to slow to less than 20 per cent over the next four years. Between the end of 2000 and mid-2004, official reserves had increased by 66 per cent.
One two caveats: this poll was taken in the fall of 2004, so we should have expected to see an actual drop-off in official purchases in the past few months. The fact that this has not happened — yet — does call the survey results into question. UPDATE: and second, a fact that I either missed in reading this story the first time around or was added after I read it, is the fact that, “The 65 central banks that participated control 45 per cent of global official reserves. Individually, they had up to $250bn under management.” Which means that the central banks of Japan and China — both of which have way, way more than $250bn under management — were not included in the survey. See Brad Setser’s take on this as well. Thanks to Andrew for the link.
Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and co-host of the Space the Nation podcast. Twitter: @dandrezner
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