India's Forex Reserves Decrease on week ended December 10

India's foreign exchange reserves decreased as on week ended December 10 from the previous week, a latest report by the Reserve Bank of India showed Friday.

Foreign exchange reserves totaled $295.41 billion, up from $296.3 billion as on December 3.

Foreign currency assets amounted to $266.2 billion, also down from $267.2 billion recorded in the previous week. At the same time, gold reserves remained unchanged at $22.12 billion.

Meanwhile, the nation's reserve position in the International Monetary Fund stayed at $1.97 billion.

India's Forex Reserves Top $250 Billion

Among the so-called BRIC developing countries (Brazil, Russia, India, China), India is probably the second hottest economy at the moment, after China of course. And following in the footsteps of other developing countries, it is quickly building a massive stock of foreign exchange reserves in order to hold down inflation. Previously, I resisted covering India, because its reserves were small compared to those of China and Japan and hence its potential impact on the Dollar was limited. However, having set another record, India's forex reserves now top $250 Billion, which rank the country among the highest in the world in this regard. In fact, India is accumulating reserves at the blistering rate of $3 Billion/week! The breakdown of the reserves (in terms of foreign currency) is unclear, but it seems reasonable to believe that it is dominated by Dollar assets.

UK Pound Nears Plateau

The UK Pound has been on a tear recently, both against the USD and more surprisingly, against the Euro. The currency has been given a boost by the Bank of England’s reluctance to cut its benchmark interest rate, which at 5.75%, remains the highest among the world’s major currencies. However, many economists feel the case for a rate cut is growing stronger every month, whether or not the Bank of England is willing to acknowledge it. Inflation is only moderately high, while the fall in housing prices-exacerbated by a prolonged period of tight money-threatens to drag down the entire economy. The markets are still pricing in a rate cut by year-end, which would surely drag down the Pound should it obtain. Dow Jones Newswires reports:

“We strongly suspect that market pessimism in this respect will continue to grow, in reverse proportions to its expectations of a further hike in U.K. interest rates,” said…a senior currency strategist.

Bank of Japan Leaves Rates Alone

As expected, the Bank of Japan left its benchmark interest rate unchanged at its latest meeting. The current rate of .5% remains the lowest in the industrialized world and thus will continue to fuel the Japanese carry trade. The Bank fended off the criticism of several European Ministers, wary of the Yen’s continued appreciation against the Euro, including a 5% increase in the last month alone. The EU has insisted that Japan should hike rates immediately both to avoid global economic imbalances and to prevent its own economy from overheating. Japan defended its decision by pointing to certain small business indicators, which suggest the sector is still underperforming. Carry traders, rest easy. Bloomberg News reports:

“The Bank of Japan will probably need to put off a hike at least until December to nail down its assessment of global growth as well as the performance of small companies,” said Masaaki Kanno, a former central bank official

Europe Asks China to Revalue Yuan

Evidently frustrated by the Euro’s appreciation against the USD, a group of EU ministers has turned its attention to China, calling on it to allow the Yuan to appreciate against the Euro. While the Yuan has appreciated nearly 10% against the USD over the last two years, it has actually decreased in value against the Euro. As a result, the EU trade deficit has set a fresh record nearly every month. Unfortunately, the Yuan basically remains pegged to the USD, and since the USD is depreciating faster against the Euro than against the Chinese Yuan, the law of triangular arbitrage dictates the Euro must be appreciating against the Yuan. It appears China’s hands are tied. Bloomberg News reports:

“I can assure you China will continue to adopt a reform oriented policy on its exchange-rate mechanism,” said a Chinese Foreign Ministry spokesman. “But these adjustments have to be done gradually and in line with the market.”

How to Profit from a Falling Dollar

The Dollar has been sliding steadily for close to a year, and Wall Street has been rushing to introduce a spate of new investment products to help investors profit accordingly. For those who do not want to trade currencies directly, Exchange Traded Funds (ETF’s), probably represent the best alternative. The typical currency ETF tracks a basket of currencies and most ETFs are characterized by low fees. In fact, over $2.7 Billion is currently invested in such ETF’s, which have risen from virtually nothing over the last 7 years. Another option is to buy CDs or other money market instruments denominated in other currencies. Online banks such as Everbank offer such products. Yet another option is to buy shares in mutual funds that aim to mimic the returns offered by investing directly in foreign money market instruments. Finally, one can simply buy shares in foreign companies or in American multinational companies that do significant business abroad.

IMF Comments on Currencies

Rodrigo Rato, outgoing president of the International Monetary Fund ("IMF") recently offered his two cents on developments in the forex markets. He began by cautioning against "excessive volatility," or the rapid fluctuations which have recently afflicted many of the world's major currencies. Next, he suggested that the Dollar has moved from being massively overvalued to being massively undervalued. In other words, it is his assessment that the Dollar has depreciated far too rapidly over the last few years. Finally, he suggested that a tightening of Japanese monetary policy would be in the best interest of global economic stability. As Rato is no doubt aware, higher Japanese interest rates would put an end to the carry trade, and drive the Yen upwards in value. The Financial Times reports:

The outgoing IMF chief also hints at unease about Japan's yen, which remains weak in part because of ultra-low interest rates. “Normalisation of monetary policy in Japan is an important medium-term objective.”

Japanese Forex Reserves Near $1 Trillion

Japan's Central Bank now controls over $950 Billion in foreign exchange reserves, second only to those of China. While Japan is not accumulating significant new reserves, its existing reserves have appreciated in value due to the Euro's recent ascent. Analysts are keeping a close eye on the reserves of both countries, which represent close to 50% of the world's foreign exchange reserves. In addition, analysts will be watching China, which may take a cue from Japan and diversify some of its reserves into Euro-denominated assets in order to offset the effect of the declining Dollar. AFX News Limited reports:

Japan's reserves are closely watched for evidence of how the country is managing its foreign currency holdings. Its actions are seen as having a significant impact on exchange rates and bond markets around the world, particularly the US government bond market.

Korean Won Benefits from Falling Dollar

It seems the collapse of the USD is quickly spreading; the Korean Won has become the latest currency to cash in on the sagging Dollar. As with regard to other currencies that have risen against the Dollar, forex analysts are not attributing the Won's rise to strength in the Korean economy, but rather weakness in the US economy. It is also worth noting that previously, when the Won rose sharply against the Dollar, the Korean government moved quickly to intervene in forex markets in a vane attempt to protect the export-dependent Korean economy. However, as the Won inevitably continued to rise, the government incurred massive losses, essentially for naught. As a result, analysts expect the Korean government to remain on the sidelines this time around. The Korea Times reports:

"Other than verbal intervention, it will be difficult for the government to actually meddle in the market to help stop the won's appreciation."

China Launches Forex Investment Arm

After much delay, China finally launched the bureau charged with diversifying its $1.4 trillion foreign exchange reserves. The agency will be capitalized with $200 billion and will invest in assets slightly more risky than US treasury securities. Most currency analysts view diversification as tantamount to the sale of dollar-denominated assets, but in practice, this may entail only the movement of funds into riskier dollar-denominated assets. In fact, the investment arm’s opening move was a $3 billion investment in The Blackstone Group, an American financial conglomerate. Dollar bulls can hold off on worrying just yet.

Australian Dollar Reaches Record High

The Australian Dollar recently touched a 20-year high against the USD, having risen 15% in the last month alone. In fact, the currency has proved to be one of the top performers against the USD in 2007, having benefited from continued weakness in the US economy. It has also been one of the chief beneficiaries of the Yen carry trade, in which investors have sold Yen in favor of higher-yielding currencies, which also include the Swiss Franc and New Zealand Dollar. Meanwhile, Australia's economy is surging, as Chinese demand for raw materials is unabated. Many analysts are asserting that the Australian Dollar can go no higher, citing technical factors. However, there seems to be just as many analysts who expect the AUD to test the outer limits of parity with the USD. The Sydney Morning Herald reports:

The chief equities economist at CommSec, Craig James, said the dollar was now likely to enter the “nervous nineties.”

China's forex reserve tops $1.43 trillion

China's foreign exchange reserve had reached 1.43 trillion U.S. dollars by the end of September, up 45.1 percent year-on-year, the People's Bank of China announced on Friday.

A total of 367.3 billion U.S. dollars were added to the country's foreign exchange reserve in the first nine months of 2007, said the central bank.

In September alone, the forex reserve rose by 25 billion dollars.

China's soaring trade surplus is still the major contributing factor to the forex reserve boom.

Data newly released by the General Administration of Customs shows that China's trade surplus for the first nine months of the year has reached 185.7 billion dollars, exceeding the total trade surplus of 177.47 billion dollars for 2006.

The huge forex reserve is considered the main reason for excess liquidity in China, as the central bank has to spend quantities of basic money to purchase foreign exchange, thus aggravating the problem of surplus fluidity.

By the end of September, the M2 -- a broad measure of money supply, which indicates the monetary demand of the whole of country and possible inflation -- grew by 18.45 percent from a year ago to 39.31 trillion yuan.

The growth rate is 1.39 percentage points higher than the end of June and still higher than the target growth of 16 percent set by the central bank at the beginning of this year.

A total amount of 195.8 billion yuan was poured into the market during the first nine months, 30.2 billion yuan more than the same period of last year.

On the other hand, continuous growth of the forex reserve has in fact increased the pressure on appreciation of the Chinese currency, which in turn has exerted greater pressure on value preservation of China's forex reserve.

The central parity rate of the RMB was 7.5114 to the U.S. dollar on Friday.

In a move to make better use of the country's huge forex reserve, China announced the establishment of the China Investment Corporate Ltd. (CIC), the country's state forex investment company at the end of September.

The state-owned investment company will invest in overseas financial markets.

The registered capital of 200 billion dollars of the CIC all comes from the forex reserve of the country, which will be obtained by issuing a total of 1.55 trillion yuan special treasury bonds by the Ministry of Finance (MOF).

So far, the ministry has issued more than 700 billion yuan (93.3 billion dollars) of special treasury bonds, with 600 billion yuan to the central bank and 100 billion yuan targeting the general public. It will issue another 100 billion yuan of treasury bonds by the end of this year.






China forex reserves become the world's biggest

China has overtaken Japan to become the world's biggest holder of foreign exchange reserves after its stockpile grew US$8.5 billion in February to US$853.7 billion, the China Business News reported on Tuesday.

Japan had reserves at the end of February of US$850.1 billion.

Growth in China's reserves last month slowed from US$26.3 billion in January, the Shanghai newspaper said.

"The massive foreign exchange reserves have brought about many benefits, but they also reflect continued imbalances in the economy," the newspaper said.

China's reserves have ballooned in recent years as the central bank, in order to hold down the yuan, has bought most of the dollars generated by a growing trade surplus, inflows of foreign direct investment and speculative capital.

The average increase in reserves of US$17.4 billion in January and February is close to the average rise of US$16.6 billion a month in the last quarter of 2005.

The reserves total would have been even bigger if Beijing had not used US$60 billion to recapitalise three big banks.

The central bank also sold US$6 billion from its reserves in November under a one-year swap deal with local banks.