Who‘s Following A Strong-Dollar Policy?
November 17, 2003
Whenever Treasury Secretary Snow speaks about the U.S. dollar, he always says that the Bush administration is in favor of a strong dollar. But who is actually following a strong dollar policy? Is it the U.S. or foreign central banks? The chart below suggests that foreign central banks are doing the heavy lifting, if not to promote a strong dollar, then to prevent a totally collapsing one. The chart shows the weekly holdings by foreign central banks and other foreign official institutions of U.S. government and agency securities in custody accounts at the Federal Reserve Bank of New York. As of Wednesday, November 12, these custody account holdings hit a record high of $1,005.334 billion, or, in round terms, $1 trillion. Versus year ago, these custody holdings are up $195.447 billion. Basically, foreign central banks, mostly those located in north Asia, have become the residual foreign lenders to the U.S. As foreign private lenders have slowed the pace of their funds advances to the U.S., foreign official lenders have filled the gap. Just as the U.S. central bank, a.k.a., the Fed, has perpetuated the imbalances in the U.S. economy brought on by the late 1990s stock market bubble, foreign central banks also are perpetuating imbalances by supporting the U.S. dollar. Selfishly speaking as a U.S. consumer, I hope foreign central banks redouble their efforts. But being a realist, I know that as their economies overheat or asset bubbles become inflated, these foreign central banks will be forced to cut back on their purchases of U.S. dollar-denominated assets. Talk about volatility in financial markets. You ain’t seen nothing yet.
Paul L. Kasriel
Director of Economic Research
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