forex reserves

Fighting currency appreciation is an expensive business. It cost the Swiss SFr 21bn ($23bn) before they gave up and let the franc rise. New figures out from the Bank of Israel show it cost them NIS 17.6bn ($4.8bn). The Bank’s overall loss was NIS 17.9, of which 98 per cent can be attributed to exchange rate moves.

Israel’s foreign exchange stockpile has been growing – but the governor says these reserves might prove useful if there is a reversal of capital flows. Israel has been raising rates to contain inflation and dampen the too-buoyant housing market. The governor has called for international rules on foreign exchange markets and capital flows, just as exist currently for trade.

Israel’s foreign currency reserves stood at $70.9bn at the end of December, according to Bloomberg – but they may well be needed.

Central bank governor Stanley Fischer has warned that capital inflows could reverse sharply, leading the Bank to sell its reserves to try to slow any sudden weakening of the shekel. “One of the things that does concern us is that we have a lot of money coming in,” Mr Fischer told Bloomberg Radio in Davos. “If opinions change quickly money goes right back out and it could go out very fast.” 

China will allow foreign central banks and overseas lenders to start investing in the country’s domestic interbank bond market for the first time, in a move aimed at encouraging internationalisation of the Chinese currency.

The People’s Bank of China, the central bank, said on Tuesday it had launched a pilot project to allow greater foreign access to its largely closed domestic interbank bond market in order to “encourage cross-border Rmb [renminbi] trade settlement” and “broaden investment channels for Rmb to flow back [to China]”. 

China has repeated its commitment to US debt (as though they’d do anything else when they’re long an estimated $2,450bn). But the data back them up. Figures show the drop in US holdings was among advanced economies; emerging economies increased their holdings, in aggregate, between Q409 and Q110. Indeed, emerging markets’ increase more than offset advanced countries’ decrease, leading to a small net increase overall. Data from IMF.

Related post: Advanced economies destock dollar by $5.5bn (July 2)

Which reserve currencies are left for central bankers, concerned first about the dollar, and now the euro?

Peter Garnham, the FT’s currency correspondent, points out that the likely beneficiary of the more recent euro crisis has been the dollar, “simply because other destinations – Canada and Australia for example – are simply not large enough for them to use as significant diversification destinations.”

Will this dollar-euro ping-pong continue, and, even if it does, are the combined euro-dollar fortunes of the past two years meriting ever smaller reserve allocations? 

James Politi

A new debate is set to rage within the Fed in the wake of its decision to re-open currency swap lines with foreign central banks.

Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, today said at an event in North Carolina that the move was “not a problem” but “we’re going to think about whether we sterilise” the swaps. 

James Politi

One of the more curious elements of the Federal Reserve’s announcement on Sunday night regarding the re-establishment of dollar liquidity swaps with foreign central banks was that the Bank of Japan was not on the initial list of counterparties. But the Fed did say that the BoJ would consider “similar measures soon”.

Indeed it did. Twelve hours later, the BoJ approved its participation in the swaps. Like all the counterparties except the Bank of Canada, which is capping the size of its facility at $30bn, the Bank of Japan has placed no upper limit on its size. But like the Bank of Canada, the BoJ is not expecting to start currency swap operations this week, as the Bank of England, Swiss National Bank, and European Central Bank are expected to do.

A new record as Chinese foreign exchange reserves hit $2,450bn – but the rate of increase is slowing, relative to last year.

China already has by far the world’s largest foreign exchange reserves (see comparison). A slowdown has happened before, and did not prevent subsequent growth: during late 2008 and early 2009 reserves were stagnant, actually decreasing in some months.