Foreign Central Banks Switching out of US Dollars
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The United States needs to draw in more than $3 billion every working day just to break even from external deficits, and prevent the US dollar from falling further and keep interest rates from rising too far. The US current account deficit is the broadest measure of trade, including financial transfers along with goods and services, and widened $136.9 billion from 2004 to $804.9 billion in 2005, representing 6.5% of US gross domestic product, up from 5.7% in 2004.
However, Treasury data showed that central banks only bought a net $1.6 billion of US stocks and bonds in March, the lowest since they were $14.4 billion net sellers in March of 2005. Japan, the largest foreign holder of US government debt, sold a net $18.2 billion in Treasuries in February, but still holds a total of $640.1 billion. China bought a net $1.6 billion in US debt in March and holds $321.4 billion. Middle East oil kingdoms recycled $16.8 billion petro-dollars through British banks, and UK holdings rose in March by $16.8 billion and total $251 billion.
Nowadays, the US dollar is heavily dependent upon its role as the world's reserve currency, used for transactions in internationally traded commodities such as copper, crude oil, and gold. Therefore, foreign central banks must stockpile US dollars, which account for more than two thirds of all central bank reserves worldwide. This special reserve status means that the US dollar is always in demand, whatever the underlying strength of the US economy, or the level of US interest rates.
But the US dollar’s counter trend rally from January 2005 to March 2006, that rode on the back of 16 quarter-point rate hikes by the Federal Reserve, started to unravel in April, following news that Sweden's Riksbank Sweden has cut its US dollar holdings, from 37% to 20%, with the Euro's share rising to 50 per cent. Kuwait, Qatar and United Arab Emirates also said they were buying Euros. Central banks in China and Japan hold less than 2% of their combined $1.75 trillion of foreign currency reserves in gold, and instead, hold depreciating US bonds.
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The United States needs to draw in more than $3 billion every working day just to break even from external deficits, and prevent the US dollar from falling further and keep interest rates from rising too far. The US current account deficit is the broadest measure of trade, including financial transfers along with goods and services, and widened $136.9 billion from 2004 to $804.9 billion in 2005, representing 6.5% of US gross domestic product, up from 5.7% in 2004.
However, Treasury data showed that central banks only bought a net $1.6 billion of US stocks and bonds in March, the lowest since they were $14.4 billion net sellers in March of 2005. Japan, the largest foreign holder of US government debt, sold a net $18.2 billion in Treasuries in February, but still holds a total of $640.1 billion. China bought a net $1.6 billion in US debt in March and holds $321.4 billion. Middle East oil kingdoms recycled $16.8 billion petro-dollars through British banks, and UK holdings rose in March by $16.8 billion and total $251 billion.
Nowadays, the US dollar is heavily dependent upon its role as the world's reserve currency, used for transactions in internationally traded commodities such as copper, crude oil, and gold. Therefore, foreign central banks must stockpile US dollars, which account for more than two thirds of all central bank reserves worldwide. This special reserve status means that the US dollar is always in demand, whatever the underlying strength of the US economy, or the level of US interest rates.
But the US dollar’s counter trend rally from January 2005 to March 2006, that rode on the back of 16 quarter-point rate hikes by the Federal Reserve, started to unravel in April, following news that Sweden's Riksbank Sweden has cut its US dollar holdings, from 37% to 20%, with the Euro's share rising to 50 per cent. Kuwait, Qatar and United Arab Emirates also said they were buying Euros. Central banks in China and Japan hold less than 2% of their combined $1.75 trillion of foreign currency reserves in gold, and instead, hold depreciating US bonds.
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posted by TheFuriousGourmet | 12:00 PM
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