Monday, November 14, 2016

z A Strong Dollar and FX Reserves 11/14/16

March 2015 intraday high 100.72  close  100.04
Nov/Dec 2015 intraday high 100.60  close 100.21
Today intraday high 100.24  close 100.02

It really matters to the Chinese yuan.  The EM exports the most to China, replacing the US as the biggest destination for their materials.  When China’s yuan depreciates, China loses purchasing power and buys less from the EM as prices are higher.  But in actuality, when the yuan is going down, so are the EM currencies.  Capital flows both out of China and EM countries to the US.

With a shortage of dollars the EM and China scramble to obtain them because there is so much debt in these countries in dollars.  Dollar loans have to be service in dollars.

Additionally, varying degrees of bank funding is done in dollars.  So banks are really hard hit as they need dollars for both their clients and themselves.

A strong dollar can be characterized as a run on the dollar.  And it is monetary tightening.  Easy flowing dollars is liquidity.  Liquidity is what is left over for the financial system when economic transactions are satisfied.  It is liquidity that makes the financial system work for itself and for business that relies on financing, which is most.

A strengthening dollar hurts the rest of the world.  Monetary tightening creates economic contraction.

I don’t understand it but I think foreign exchange reserves at central banks may not consist of a lot of actual money, you know, accounting debits like cash or gold.  I think they are mostly accounting credits just like commercial banks create credits to the system when lending creates deposits which are in fact a liability.  These liabilities always remain liabilities until they are paid back.  They never become debits to cash in the commercial banking system.

As I said, I don’t understand it, but I think central banks of the world create dollar denominated credit money instruments that they then call reserves.  The whole central banking world trades in these credits, these liabilities.  I think.

These particular foreign exchange reserves are not permanent like commercial bank loans are not permanent.  I think.  I guess it is ok as long as these central bank foreign reserve credits remain intact.  That is, are able to be funded with liquidity especially dollars.

A dollar shortage can be a problem for these FX reserves, I think, and a stronger dollar indicates a dollar shortage.

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