With everyone lately focused on China's foreign reserve position, analysts have forgotten that America also has an International Reserve account consisting of foreign currency positions, as well as gold reserves and equivalents. And while the total combined holdings as of the most recently reported period are a joke compared to China's $2+ trillion, the most recent
number of $133.6 billion does raise red flags, particularly when one traces this number's level throughout the year.
We present a graphic representation of the US International Reserve Position over the past year:
The big question mark at the end of August is when the U.S. International Reserve Position increased by almost 50%. The reason for this: a near quintupling of S.D.R. holdings on the U.S. balance sheet in the span of one week - from August 21 to August 28.
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Economic Analyst, explain how the U.S. increasing it's SDR holdings indicates a dollar devaluation.
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ReplyDeleteBy purchasing $40 billion in SDRs virtually overnight, what the Fed has done is to increase the value of the entire basket pro-rata, while in the process reducing the actual value of the dollar (which is a weighted constituent of the SDR basket). This was an operation to reduce the dollar's value: pure and simple. In many ways it explains why the DXY has continued its straight one way decline since the beginning of September, when many pundits assumed the market was finally going to tank on profit taking after Labor day. By performing this dollar adverse transaction, the Fed sent a loud and clear signal what the Fed was going to do going forward vis-a-vis the i) dollar and ii) its derivative, the stock market.
And what is worse, this is not a roundabout or circuitous way of devaluing the dollar: this is head on intervention.
Timetable? Are the results of this long term, or is this an overnight event that will catch us all off guard?
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