World currency reserves shrink by $1.4 trillion in record drawdown

Reserves have declined by about US$1 trillion (S$1.4 trillion), or 7.8 per cent, this year to US$12 trillion. PHOTO: EPA-EFE

NEW YORK - Global foreign currency reserves are falling at the fastest pace on record, as central banks from India to the Czech Republic intervene to support their currencies.

Reserves have declined by about US$1 trillion (S$1.4 trillion), or 7.8 per cent, this year to US$12 trillion, the biggest drop since Bloomberg started to compile the data in 2003.

Part of the slump is simply due to valuation changes. As the United States dollar jumped to two-decade highs against other reserve currencies, like the euro and yen, it reduced the dollar value of the holdings of these currencies.

But the dwindling reserves also reflect the stress in the currency market that is forcing a growing number of central banks to dip into their war chests to fend off the depreciation.

India's stockpile, for example, has tumbled US$96 billion this year to US$538 billion. The country's central bank said asset valuation changes accounted for 67 per cent of the decline in reserves during the fiscal year from April, implying that the rest came from intervention to prop up the currency. The rupee has lost about 9 per cent against the dollar this year and hit a record low last month.

Japan spent about US$20 billion in September to slow the yen's slide in its first intervention to support the currency since 1998. That would account for about 19 per cent of the loss of reserves this year. A currency intervention in the Czech Republic has helped drive down reserves there by 19 per cent since February.

"This is all part of the catalogue of symptoms of the canary in the coal mine," said Mr Axel Merk, chief investment officer at Merk Investments, of the declining reserves. "Cracks are showing up, and those red flags will come at an increasing pace."

While the magnitude of the decline is extraordinary, the practice of using reserves to defend currencies is not anything new. Central banks buy US dollars and build up their stockpiles to slow currency appreciation when foreign capital floods in. In bad times, they draw on the reserves to soften the blow from capital flight.

"Some countries, notably in Asia, can go both ways, smoothing weakness and pockets of strength," said Mr Alan Ruskin, chief international strategist at Deutsche Bank.

Most central banks still have enough firepower to keep interventions going, if they chose to. Foreign reserves in India are still 49 per cent higher than 2017 levels, and enough to pay for nine months of imports. Central banks including those from Indonesia, Malaysia, China and Thailand will be releasing their latest foreign reserves data on Friday.

But for others, the reserves are quickly depleting. After declining 42 per cent this year, Pakistan's US$14 billion of reserves are not enough to cover three months of imports, data compiled by Bloomberg shows. BLOOMBERG

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