B.Featured currency The market was considered unwise by central banks and policy makers. The idea stalled and was arguably futile, because burning foreign exchange reserves to counter forces pushing or pulling the value of a currency is absurd. Orthodox argued that countries seeking to protect their currencies should raise interest rates rather than sell their reserves.
This was put to a real test last year as the US raised interest rates and the dollar appreciated. Officials in many emerging economies have increased their holdings to protect their currencies.according to imfglobal FX reserves fell by $1.1 trillion between the end of 2020 and the third quarter of 2022, with dollar-denominated asset holdings accounting for half of the decline.
But over the past few months, the process has begun to reverse as the dollar weakens and pressure on countries to intervene to protect their currencies recedes. Combined gold holdings have increased by $243 billion since October to a total of $5.6 trillion due to a combination of revaluations and new purchases. India’s foreign exchange reserves have also risen by $42 billion since October, recovering more than a third of his losses over the past 12 months.
A recent paper by Rashad Ahmed of America’s Office of the Comptroller of the Currency and co-authors suggests that large reserve builders may actually have reasons to rebuild. increase. Entering 2021, countries with higher FX reserves and more credible ability to intervene saw less currency depreciation, but everything else was the same. The authors calculate additional reserves equal to 10 percent of the national treasury. gdp It was associated with 1.5% to 2% less depreciation of the local currency against the dollar.
On the other hand, many countries that started out with modest reserves during this period have suffered heavy depreciation. The Egyptian pound, which was trading at 16 to the dollar at the beginning of 2020, is now trading at 31. The official Pakistani rupee exchange rate has also fallen from $154 to $278 at the start of the covid-19 pandemic. Recently. In both places the black market offers even lower rates.
Ahmed and co-authors point out that healthy FX reserves may have other benefits. Eliminating the need to use interest rates to protect the currency would allow “domestic monetary policy to better target domestic objectives.”
But the danger is that currency intervention will come to be seen as a way to avoid more painful rate hikes. but, imf Although I’m not as vehemently opposed to foreign exchange intervention as I used to be, there are still some limitations. As recently as October, when the dollar was at its peak, Gita, the deputy managing director of financial institutions, He Gopinath, and Chief Economist Pierre Olivier, His Gourinsha, said that financial and He warned against using monetary intervention as a substitute for tightening fiscal policy.
The experience of large reserve holders during the recent dollar surge may give the government another idea. Being able to resist pressure to track the Federal Reserve’s rate moves is a stated goal for many developing countries, and the more reserves they hold, the more likely they are to resist. ■
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https://www.economist.com/finance-and-economics/2023/02/23/big-asian-economies-take-on-the-forces-of-international-capital-and-win Asian powers stand up to the power of international capital and emerge victorious