Emerging markets have been consuming their stockpiles of foreign exchange reserves this year at a faster pace than in previous bouts of currency weakness as central banks fight to defend their currencies against the mighty U.S. dollar, Reuters said in a report yesterday. China, which holds the world’s largest total forex reserves in excess of $3 trillion, drew down $195 billion from January to August this year, according to Chinese central bank data.
This was more than six times the $30 billion it depleted over the same period in 2018, during the Federal Reserve’s previous tightening cycle. During another strong dollar phase in 2014, China’s forex reserves fell by $61 billion from March to October. “A lot of central banks are facing that extremely difficult choice right now, when their currencies are depreciating against the dollar,” said Ana Jelenkovic, sovereign strategist of the emerging markets group at Marathon Asset Management, referring to currency reserves.
“Do they let that be the buffer, do they let that absorb the shock? Or do you use some of your assets, reserve buffers, if you think this is just sort of a temporary shock?” India’s forex reserves had fallen by $71 billion by August this year, while Brazil lost $29 billion by September. In contrast, during 2014’s dollar strength, both countries had recorded an increase in their reserves in the eight months to October. The rupee is down almost 10% against the dollar this year. While Brazil’s reserves have also fallen, it has seen its real rise about 5%, supported by one of the highest reserves to shortterm external debt ratios among emerging markets.
