Foreign central banks financed the remainder of our external deficit by also piling up dollar reserves.
In China, our focus is on capturing cross-border flows tapping into the nation's large dollar reserves.
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Does Indonesia have the dollar reserves to support a peg in the first place?
Their governments have balanced their budgets and built up trade surpluses along with dollar reserves.
Since then, they have dramatically expanded their dollar reserves in an effort to hold their currencies down.
Foreign government accumulation of dollar reserves provides some measure of assurance against the ill effects of U.S. policy.
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But he worries about what might happen if central bank dollar reserves stop growing at such a fast pace.
As the world absorbed about all the dollar reserves they wanted to hold, they became reluctant to accept more.
Asia's vast holdings of dollar reserves also expose the region to vast losses whenever the dollar falls in value.
Asian central banks in particular have been aggressive collectors of dollar reserves.
Currency boards work when their governments have the dollar reserves needed to make the guarantee credible, which at present Indonesia does not.
Asian economies, they argue, have chosen to link their currencies to the dollar at undervalued rates, supported by heavy purchases of dollar reserves.
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But as the IMF points out, the currency's primacy arises at least partly because China and other emerging countries have chosen to accumulate dollar reserves.
As it piled up dollar reserves, China didn't invest them at home but sent them back to the U.S. to purchase T-bills and Fannie Mae mortgage-backed securities.
Large capital inflows have forced China's central bank to buy massive quantities of dollar reserves, which have spilled over into excessive growth in the money supply and credit.
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They wanted the U.S. to do more than it was doing to correct its external imbalance and they showed an interest in actually cashing in their excess dollar reserves for gold.
Whichever numbers you choose, central banks' increases in dollar reserves have been large compared with overall foreign purchases of American bonds, and huge compared with the size of the current-account deficit.
The U.S. committed to exchange for gold dollars held by foreign central banks and Treasuries (governments) while other countries used their dollar reserves to peg (i.e. manipulate) their currencies to the dollar.
Inflation also cheapens the purchasing power of the debt held by foreign governments, namely China, who must eventually spend their trillions in dollar reserves on goods, services or investments other than debt.
Last year, the loss on its dollar reserves, as a result of a modest rise in the yuan, was partially offset by a gain on its euro-denominated reserves as the euro strengthened.
The former Pimco emerging-market superstar also believed that the developing countries offered big profits to smart investors like HMC because they had become less risky thanks to ample dollar reserves and a growing middle class.
The country has made a first move towards changing its exchange-rate regime, which might eventually imply fewer reserves overall as well as some diversification away from dollar reserves, but nothing suggests that it is in any hurry.
We note the sharp contrast with 2001, when a shortage of dollar liquidity (strong and strengthening dollar, high real interest rates, low central bank dollar reserves, falling gold and commodity prices, rapidly shrinking U.S. profits) all spelled weakness.
That manipulated, pegged, or fixed-rate system worked well in the early postwar years when there was apparently an unlimited demand for dollar reserves, which we were happy to provide to the world in the form of external deficits.
Hong Kong keeps its dollar stable by backing each dollar's worth of local money by one American dollar of reserves.
And, these trillion dollar cash reserves are controlled in every case by the respective royal families, typically in sovereign or quasi-sovereign wealth funds.
As a result, all the developing countries have their foreign exchange reserves in dollar-denominated assets.
And again, that assumes that foreigners continue to put 100% of their fresh reserves into dollar-denominated assets.
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It means that foreign reserves and dollar transactions fund the U.S. economy.
This means that one dollar added to the reserves of a bank, leads to ten dollars in new money or money equivalents.
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