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One sign of crisis abatement is the downward slide of the U.S. dollar. As the market rediscovers its appetite for risk, the dollar's appeal as a safe haven currency diminishes. Indeed, the dollar has become the de facto carry trade currency.

The market has renewed its faith in emerging markets, and the U.S. has more tools to repair its trade balance and begin a phase of export-led growth? Is this a win-win situation? Not quite.

Although the dollar may be weakening, this weakening hasn't stopped central banks from accumulating more dollar reserves. In fact, dollar weakness may be accelerating accumulation.

Last week, several emerging market countries intervened in currency markets in order to prop up the dollar (or, rather, to push down their own currencies). This involves buying dollars: Russia recently picked up $1.4bn in a single day, and $4bn in the same week.

What are central banks doing with these dollars? Most of them are tucking them away for a rainy day, having seen the benefits of such accumulation during the crisis.

A few months ago, Deutsche Bank released a report which prescribed forex accumulation as a necessary strategy for future emerging market growth and stability:

The amount of FX reserves in relation to external financing requirements is still crucial to the assessment of countries’ resilience to external shocks. From a policy perspective, accumulating FX reserves still seems to be pretty good insurance.

Rebecca Wilder, writing in yesterday's Angry Bear, agrees:

Key markets in Asia (China, or South Korea) and Latin America (Brazil) remained rather resilient to the credit crunch late in 2008 due to sufficient (even excessive) reserves holdings. Brazil, for example, was able to supply private-sector financing needs by draining FX ($USD) reserve holdings. South Korea and other Asian economies, too.

Record inflows of late into EM financial markets (bonds and equities) are providing plenty of liquidity and contributing to reserve accumulation of late. However, having sufficient FX reserves has proven to be the best insurance out there against a stoppage in external financing. And as long as inflation pressures remain muted, acquiring reserves is not too costly economically (there are administrative costs, though, from sterilization when U.S. Treasury rates are near zero.)

Targeted reserve accumulation, in whatever currency but still heavily weighted in $US, buffered EM countries from catastrophe and is not going away.

Wilder notes that reserves in Brazil are now 230% higher than they were in 2007, 197% in China, 190% in Thailand, and 163% in Hong Kong. Reserves in South Korea grew by 26 percent in the first three quarters of 2009, Taiwan's by 14 percent. Indeed, the total supply of global reserves has tripled since 2000.

If pressure on the dollar continues, and countries such as China maintain dollar pegs (while other simply try to limit the appreciation of their own currencies), reserve accumulation is likely to accelerate.

Four months ago, in reaction to the Deutsche Bank report, I concluded:

The question remains as to how central banks' desire to purchase this kind of (fx) insurance can be squared with the need to resolve global macroeconomic imbalances.

This question still remains.