Asian central banks build dollar war chests as they gird for Fed – Bloomberg

As global markets brace for the US Federal Open Market Committee (FOMC) meeting on early Wednesday, Bloomberg came out with the analytical piece suggesting a build of strong forex reserves by Asia’s emerging economies.

“Central bank holdings of foreign currencies in the region’s fast-growing emerging economies hit $5.82 trillion as of May, their highest since August 2014. When China’s cash pile is stripped out, emerging Asian central banks’ reserves stood at an all-time high of $2.6 trillion,” said the piece.

Bloomberg also adds, “While the Fed is expected to maintain a dovish outlook when it meets this week, economists say the accelerating US recovery means the bank will need to signal a policy turn sooner than anticipated. Central banks in South Korea and New Zealand already have said their improving economies may eventually justify higher interest rates.”

The piece quotes Tuuli McCully, head of Asia-Pacific economics at Scotiabank as saying, “Any hint of a Fed shift on tapering will quickly test defenses including current-account surpluses and foreign-exchange holdings.”

While noting the conditions, DBS Bank’s Economist Radhika Rao said, per Bloomberg, “Compared to 2013, regional countries, particularly the most affected, are in a less vulnerable position.”

Market implications

The analytical piece suggests a less vulnerable condition for the Asian economies should the Fed adheres to tapering, which in turn could help the key currencies to hold grounds versus the US dollar.

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