<\/p>\n
News:<\/span><\/b> Recently, the sanctions imposed by the west following the Russia-Ukraine conflict have triggered discussions on how other countries would manage their <\/span>foreign currency (FX) reserves,<\/span><\/b> which are used as an <\/span>insurance<\/span><\/b> against <\/span>economic shocks<\/span><\/b>.\u00a0<\/span>\u00a0<\/span><\/p>\n A country running current account surpluses accumulate foreign assets over time. For example, China and Saudi Arabia have grown their foreign asset holdings<\/span>\u00a0<\/span><\/p>\n Reserves have been part of e<\/strong><\/span>conomic discourse<\/span><\/b> for more than a century. They were helpful during the <\/span>interregnum <\/span><\/b>between the two world wars, and in 1935 when economic sanctions were imposed on <\/span>Italy <\/span><\/b>for attacking <\/span>Ethiopia<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n The <\/span>Asian Financial Crisis<\/span><\/b> 1998 reinforced the need to have sufficient reserves.\u00a0<\/span>\u00a0<\/span><\/p>\n The global FX reserves rose from 2 trillion USD in 1999 to nearly 12 trillion USD by 2014. It was based on the premise that the forex is important to cover all<\/span> short-term external debt<\/span><\/b>.<\/span>\u00a0<\/span><\/p>\n However, the share of the USD in global FX reserves has fallen from 71% in 1999 to 59% in 2021. This has shifted to the <\/span>Euro, <\/span><\/b>the<\/span> Yen<\/span><\/b>, the <\/span>Chinese yuan (CNY)<\/span><\/b>, the <\/span>British pound<\/span><\/b>, and the <\/span>Canadian<\/span><\/b> and <\/span>Australian dollars<\/span><\/b>. <\/span><\/p>\n CNY share of global financial transactions (both trade-related and financing-related) is bound to rise.<\/span>\u00a0<\/span><\/p>\n Liquidity comes at a cost, which can be financial or geopolitical cost. On the contrary, the<\/span> geopolitical returns<\/span><\/b> on the liquid assets are lower than on less liquid and less safe assets.\u00a0<\/span>\u00a0<\/span><\/p>\n Therefore, reserves as a share of <\/span>total foreign assets <\/span><\/b>have fallen for China, Saudi Arabia and any other country (<\/span>except Switzerland <\/span><\/b>and <\/span>India<\/span><\/b>).\u00a0<\/span>\u00a0<\/span><\/p>\n The US inflation could continue to push down the share of global reserves held in USD assets.<\/span>\u00a0<\/span><\/p>\n Triffin Paradox<\/span><\/b>: <\/span>A country whose currency becomes <\/span>a global reserve currency<\/span><\/b> would have to run a continuous <\/span>trade deficit<\/span><\/b>. It has to keep borrowing to provide a <\/span>sufficient supply of assets<\/span><\/b> to the whole world.<\/span>\u00a0<\/span><\/b>\u00a0<\/span><\/p>\n Further, <\/span>\u201cNew Triffin dilemma\u201d<\/span><\/b> says that the US would not be able to supply the safe assets the world needs, as the US share of global GDP declines<\/span>\u00a0<\/span><\/p>\n (1) Sovereign Wealth Funds (SWF):<\/span><\/b>\u00a0 SWFs globally now manage 10 trillion USD of assets. For example, Norway, Saudi Arabia and Singapore have grown their SWF at large scale<\/span>\u00a0<\/span><\/p>\n (2) Other countries like <\/span>Japan<\/span><\/b> and <\/span>China<\/span><\/b> have allowed their firms to buy <\/span>foreign assets<\/span><\/b>. These assets are hard to use in times of crisis. But they are better for the overall economy.<\/span>\u00a0<\/span><\/p>\n (3) The countries can accrue returns from bond markets. For example, recent 8% decline in the value (or increase in yields) of <\/span>10-year US government bonds<\/span><\/b> provides another investment alternative to currency adjusted returns. In fact, The US government bonds supply has grown significantly more than the demand for them from global central banks.<\/span>\u00a0<\/span><\/p>\n Source<\/span><\/b>: The post is based on an article \u201cToo Many Dollars In Reserve<\/strong>\u201d Published in the Times of India<\/strong> on 20<\/strong><\/span>th<\/strong> April 2022<\/strong>.<\/span>\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":" News: Recently, the sanctions imposed by the west following the Russia-Ukraine conflict have triggered discussions on how other countries would manage their foreign currency (FX) reserves, which are used as an insurance against economic shocks.\u00a0\u00a0 How countries accumulate Forex?\u00a0 A country running current account surpluses accumulate foreign assets over time. For example, China and Saudi… Continue reading Too Many Dollars In Reserve?\u00a0<\/span><\/a><\/p>\n","protected":false},"author":10328,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,10496],"class_list":["post-180379","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-times-of-india","entry"],"jetpack_featured_media_url":"","views":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/180379","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10328"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=180379"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/180379\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=180379"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=180379"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=180379"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}How countries accumulate Forex?<\/span><\/b>\u00a0<\/span><\/h5>\n
History of forex reserves<\/span><\/b>
\n<\/span><\/h5>\nWhat are the issues with Foreign Currency Reserves?<\/span><\/b>\u00a0<\/span><\/h5>\n
What are other options for investment?<\/span><\/b>\u00a0<\/span><\/h5>\n