The 10 year-long surge in foreign-currency reserves held by the world’s central banks is now terminating.
In March global reserves dipped to $11.6 trillion from a record
$12.03 trillion in August 2014, hampering a five-fold increase that began
in 2004, according to data compiled by Bloomberg.
The firm dollar reduced the value of other reserve currencies such as the euro, and thus the drop may be overstated. However, it marks a shift after central banks - with most of them located in developing nations like China and Russia - added an average $824 billion to reserves each year over the past 10 years.
Credit Suisse Group AG estimates that developing countries, which hold about two-thirds of global reserves, spent a net $54 billion of this stash in the fourth quarter, the most since the global financial crisis in 2008.
Russia’s supply dropped 25 percent over the past year to $361 billion in March. China cut its stockpile to $3.8 trillion in December from a high of $4 trillion in June, central bank data show, while Saudi Arabia, the third-largest holder after China and Japan, has burned through $10 billion in reserves since August to $721 billion, says Bloomberg.
As Deutsche Bank AG estimates, the tendency is likely to linger as oil prices stay low and growth in emerging markets remains weak, trimming the dollar inflows that central banks used to build reserves.
The decline in reserves has several
potential implications for global markets.
1) Dollar is given the role of the world's undisputed dominant currency.
2) The drop could also make it harder for
emerging-market countries to boost their money supply and shore up
faltering economic growth.
3) It could add to declines in the euro.
4) It could undermine demand for U.S. Treasury bonds.
The euro was especially vulnerable, as it had benefited from purchases in recent years by central banks seeking to diversify their reserves. As the International Monetary Fund reported March 31, the single currency’s share of global reserves dropped to 22 percent in 2014, the lowest since 2002, while the dollar’s rose to a five-year high of 63 percent.
Central banks in emerging economies began accumulating foreign currency reserves in the wake of the Asian financial crisis in the late 1990s to safeguard their markets for periods when access to foreign capital dries up. They also bought dollars to limit appreciation in their own exchange rates, quadrupling reserves from 2003 and boosting their holdings of U.S. Treasuries to $4.1 trillion from $934 billion.
The reserves add cash supply to the financial system - each dollar purchase creates a corresponding amount of new local currency - and helps drive the economy. In the decade through 2013, annual monetary base in China and Russia grew at an average 17 percent, data compiled by Bloomberg show. Last year the expansion rate plunged to 6 percent.
While central banks have other ways of pouring money into the banking system, such measures without the backing of increased foreign reserves could end up weakening their currencies further - an outcome they may want to avoid.
