Friday, April 13, 2007

. Federal Reserve: "Factors Affecting Reserve Balances", April 11

- Fed's Treasuries holdings: $774.5bn (-$2.0bn)
- Other central banks' Treasuries holdings: $1,236.1bn (+$15.8bn) (*)
- Other central banks' agency securities: $675.3bn (+$2.9bn) (*)
- Mackinlay's Global Dollar Liquidity Measure: $2,685.9bn (+$16.7bn)

(*) Off-balance-sheet items.

In late 2004, a number of central banks toned down their purchases of Treasury and agency securities. Worried about the build-up of domestic inflationary pressures, they suddenly let their currencies appreciate against the greenback. If I am not mistaken, the central banks of Brazil, Russia, Turkey and Mexico led the charge (I am sure Brad Setser knows all the details). Interestingly enough, the central bank of Argentina took the other side of the trade: it received strict orders from the finance ministry not to let the peso appreciate under any circumstances.

Eventually, Argentina's strategy paid handsome dividends: the economy grew at a much faster clip than Brazil's or Mexico's. (On the inflation front, however, the picture is not quite as rosy). The current wave of central bank purchases of Treasuries and agency securities seems to indicate a renewed willingness to avoid any damaging currency appreciation in a number of emerging countries. Already in April, foreign central banks have bought as much as $25bn in Treasuries, and about $6bn in agency securities. The New Bretton Woods proposition is alive and well. Global liquidity growth is strong — very strong.

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