Comments on: Sovereign Wealth Funds are sexy, but the real story right now comes from plain old central bank reserves …

By: RebelEconomist

RebelEconomist — Wed, 20 Jun 2007 10:16:29 +0000

Yes

By: Guest

Guest — Wed, 20 Jun 2007 08:24:32 +0000

“dollar-zone central banks” being ‘dollar peggers’?

By: RebelEconomist

RebelEconomist — Wed, 20 Jun 2007 05:34:19 +0000

Guest

Well, it cannot be the dollar pegging central banks that are selling dollars to diversify as that would not make sense, so it must be the rest. But why should the rest care about the dollar peggers’ holdings of dollars, especially as they are frozen by their currency policy? The only reason I can see is that they think the dollar is over-valued as a result of the buying by the dollar-peggers, which would prove my point!

By: Guest

Guest — Wed, 20 Jun 2007 05:03:45 +0000

Didn’t really say that. Just that growing $ reserves in total puts pressure on to diversify.

By: RebelEconomist

RebelEconomist — Wed, 20 Jun 2007 04:44:48 +0000

Guest,

It is not obvious to me why central bank dollar purchases should prompt other central banks to diversify out of the dollar. Why do you say they do?

By: bsetser

bsetser — Wed, 20 Jun 2007 03:49:53 +0000

incidentally, SWFs typically have a higher asian allocation/ lower $ allocation — which doesn’t really work from a global flow of funds point of view unless more asian economies start running current account deficits. but most SWFs have a different currency profile (even among the g-10) than a typical central bank, not just more appetite for risk appetite.

For example, compared to a dollar zone central bank — a sovereign wealth fund would typically have more in european currencies. But there is no reason why a dollar zone SWF couldn’t be focused on higher yielding dollar assets, as it did its part to help the country achieve its overall currency objective.

By: Guest

Guest — Wed, 20 Jun 2007 02:53:39 +0000

As MM says:

” The typical investment conclusion that the dollar should and will fall against all currencies if the official support is withdrawn is almost certainly, misplaced however; if official financing support is withdrawn, the dollar will fall, perhaps precipitously, versus those currencies against which it has been supported.”

This seems obviously true at the margin. Official support for the dollar exacerbates the need for CB diversification into non-pegged currencies, e.g. the Euro, causing the dollar to weaken against the Euro. The unwinding of official support for the dollar would unwind this requirement for further diversification, thereby removing this source of dollar weakness against non-pegged currencies.

By: RebelEconomist

RebelEconomist — Tue, 19 Jun 2007 23:38:01 +0000

To sum up the discussion about SWFs and currency effects, the dollar-peg countries’ SWFs can diversify (a given level of) reserves between instruments, but not currencies, except in the case where they buy assets in other dollar-peg countries (in which case the currency diversification value is questionable anyway).

I struggle, however, to understand Macro Man’s argument that dollar purchases by the pegging countries does not support the dollar against third currencies, although I can see why the supporting effect would be much less than the weakening effect on their own currencies. Surely, if one central bank is taking down dollar assets, that makes them a little more valuable all round?

By: Guest

Guest — Tue, 19 Jun 2007 23:01:16 +0000

Morgan Stanley predicts SWF growth to $ 28 trillion …

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aDxwx3H1ciJ4

By: HZ

HZ — Tue, 19 Jun 2007 19:41:06 +0000

Macro Man,
What you said makes sense only if the BRIC/Gulf countries stop accumulating official reserves, which implies a major current account adjustment. However if they merely change the composition, which currently favors USD, Merrill is correct that USD could come under pressure against other G10 currencies. I suspect in the near term the Merrill scenario has more chance of being correct than a major C/A correction.