JPMorgan Says Impact of $600 Billion Reserve Plunge Overstated

  • Currency effect is mostly responsible for year-long decline
  • Halt in accumulation still reverses trend of past 15 years

There may be less than meets the eye in the $600-billion drop in global foreign reserves.

Most of the slump in the 12 months through July is attributable to a stronger dollar reducing the value of reserve currencies, according to a JPMorgan Chase & Co. report. The euro tumbled 18 percent against the dollar during the period while the yen lost 17 percent of its value.

“Despite the remarkable outright decline in reserve balances over the past year, it is important to recognize that this comes at a time when both the EUR and JPY have depreciated significantly against the USD,” said JPMorgan economists led by Joseph Lupton wrote in a note Thursday.
The study may help allay some concern that developing nations may be drawing down their foreign-currency reserves too quickly, leaving them with limited resources to defend potential attacks on their exchange rates and fend off capital outflows. 

Changing Course

The halt in reserve accumulation marks a reversal of a 15-year trend where emerging-market economies helped boost the global stockpile to $12 trillion.

With developing countries still receiving dollar revenues from “sizable” trade surpluses, the report suggests these nations suffered “sharp” capital outflow. It estimated that $720 billion left emerging markets in the 12 months through July, compared with an average inflow of $200 billion in previous years.

The decline in the global reserves accelerated in August and September as China burnt through $137 billion to stabilize the yuan after it surprisingly revamped its currency regime. The actual capital outflow from China may be even bigger because the authorities also used derivatives to defend the currency, Lupton wrote.

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