Forex Blog: Currency Trading News & Analysis.

September 18th 2008

Forex Reserves Used to Prop Up Currencies

Over the last decade, the Central Banks of most emerging-market economies built up fantastic quantities of foreign exchange reserves, as a result of lopsided trade and current surpluses with foreign countries eager to invest abroad. However, declining commodity prices, sagging stock markets, and a global trend towards risk aversion have propelled investors to shift massive amounts of capital back into the industrialized world. As a result, these same Central Banks are drawing down on their reserves at a similarly rapid pace, in an attempt to shore up their ailing currencies. A cheap currency can be advantageous, especially during an economic downturn, since it makes exports relatively more competitive. On the flip side, a currency that loses too much value can trigger a crisis of confidence among investors, which affected many of these countries as recently as 1997-1998. The Wall Street Journal reports:

A rapidly weakening currency is worrisome for central banks concerned about inflation, since imported goods become more expensive, driving up overall prices.

Read More: States Play Currency Defense

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Posted by Adam Kritzer | in Central Banks, Emerging Currencies | No Comments »

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