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World’s Reserves are Now Shrinking

The long-term surge in foreign-currency reserves held by central banks is beginning to come to an end. Global foreign exchange reserves declined to $11.6 trillion in March, down from a record of $12.03 trillion in August of 2014. The upward trend in reserves globally began in 2004, according to Bloomberg Business data. Some suggest that the drop may be overstated due to the strengthening of the U.S. dollar reducing the value of other currencies, such as the Euro. This drop in reserves can be potentially problematic however. It could eventually make it harder for emerging-market countries to boost their money supply and secure economic growth. It could also add to the decline in the Euro and decrease demand for U.S. Treasury bonds.

It is estimated that these developing countries, which hold about 2/3 of global reserves, spent a net $54 billion in the fourth quarter of 2014. This was the largest amount since the global financial crisis in 2008. China, as the world’s largest holder of reserves, contributed to most of the decline, as central banks sold dollars to offset outflows. Chine cut its stock-pile of $4 trillion in June, to $3.8 trillion in December of last year. Russia and Japan, in similar nature with China, burned through large shares of reserves in 2014. Most economists believe that this trend will continue into 2015 in many of these developing countries.

One Comment

  1. Some of this is energy price cyclical, as commodity exporters spend some of their accumulated wealth. But we have to be careful about “spending” reserves as in China’s case it may be simply swapping one form of paper asset for another. It may not be of much significance from an economics perspective if the central bank sells reserves to a private bank — those dollars are still “owned” by Chinese entities, it’s only the name on the bank account that changed…

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