Central banks around the world are stepping in to support currencies as the dollar soars
(Reuters file photo)
Global foreign exchange reserves are falling at the fastest pace on record, as central banks from India to the Czech Republic step in to support their currencies.
Reserves have shrunk by about US$1 trillion, or 7.8%, this year to $12 trillion, the biggest drop since Bloomberg began compiling the data in 2003.
Thailand’s foreign currency reserves as of September 23 stood at $183.5 billion, down nearly 18% from $223.3 billion on January 7 this year, according to the Bank of China. Thailand. Net international reserves stood at $231.5 billion, down from $277.3 billion in January.
Part of the fall in reserves, as the Bank of Thailand and others have pointed out, is simply due to valuation changes. When the US dollar reached two-decade highs against other reserve currencies, such as the euro and the yen, it reduced the dollar value of holdings of those currencies.
But the decline in reserves also reflects tensions in the currency market that are forcing a growing number of central banks to dip into their war chests to stave off depreciation.
India’s reserves, for example, have fallen by $96 billion this year to $538 billion. The Reserve Bank of India said asset valuation changes accounted for 67% of the fall in reserves in the year from April, implying the rest came from interventions to support the currency. The rupee has lost about 9% against the dollar this year and hit a record high last month.
Japan spent about $20 billion in September to slow the fall of the yen in its first intervention to support the currency since 1998. That would account for about 19% of the loss in reserves this year. Currency intervention in the Czech Republic has helped drive down reserves there by 19% since February.
“It’s all part of the catalog of canary symptoms in the coal mine,” Axel Merk, chief investment officer at Merk Investments, said of the decline in reserves. “Cracks appear. And those red flags will come at an increasingly rapid rate.
While the magnitude of the decline is extraordinary, the practice of using reserves to defend currencies is nothing new. Central banks buy dollars and accumulate their stocks to slow the appreciation of the currency when foreign capital flows in. In difficult times, they draw on reserves to cushion the shock of capital flight.
“Some countries, especially in Asia, can go both ways, smoothing out weakness and pockets of strength,” said Alan Ruskin, chief international strategist at Deutsche Bank.
Most central banks still have enough firepower to sustain interventions, if they so choose. Foreign exchange reserves in India are still 49% above 2017 levels and sufficient to pay for nine months of imports.
But for others, they wear out quickly. After falling 42% this year, Pakistan’s $14 billion in reserves are not enough to cover three months of imports, according to data compiled by Bloomberg.