FX markets may be caught in a vicious circle next year
Nov 28 (Reuters) -FX markets may be caught in a vicious circle next year where intervention to suppress a rising dollar is followed by the rebuilding of central bank reserves that supports it.
This situation has been ongoing for years and has resulted in the massive accumulation of dollars that constitute's an estimated 58 percent of global reserves in excess of $12 trillion.
Over $7 trillion of foreign currencies are held in the reserves of six central banks from China, Japan, Switzerland, India, Russia and Taiwan.
All of these have tried to change the direction of their currencies with almost no success.
China's yuan and India's rupee traded toward or to record lows versus the dollar this year while Japan's yen fell to an all-time low on a trade-weighted basis. Taiwan's dollar hit a seven-year hit low.
Russia's rouble has only been spared from bigger losses following its 2022 collapse due to the fact that it is virtually un-tradable since the war against Ukraine.
Switzerland's franc set a multi-year peak versus the euro in August.
The abundantly clear failure of numerous interventions is not stopping them, with many central banks, especially those in emerging markets, still attempting to influence their currencies by selling dollars.
While they remain inclined to maintain large FX reserves that are predominately dollars, their recycling of dollars sold during interventions will see them repurchase dollars versus liquid major currencies like euro, yen and pound, supporting the greenback. That supports the dollar putting their currencies under more pressure which results in further intervention.
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Six largest FX reserves and rise of trade-weighted dollar https://tmsnrt.rs/3V8kdpW
(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)
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