I have been trying to get a sense of why we are seeing this general US Dollar weakness and have been at a loss to explain, especially of late during this geopolitical crisis over in Ukraine.
Take a look at the following chart of US Treasury Holdings by these Foreign Central Banks that are on deposit there in the Custodial account at the Fed.
Look at the steep plunge that has occurred since the beginning of this year. We have gone from a peak of near $3.021 Trillion to a current $2.855 Trillion. That is a drop of some $166 billion since the high point reached in the middle of December last year. Folks, that ain't exactly chump change.
Why this is occurring is unclear to me at this point but I feel it will be worthwhile to monitor this. As you can see on the same chart, we have seen episodes during which Foreign Central Banks tended to be fairly large sellers of Treasuries only to then have them return as big buyers. Much of course depends on their Balance of Trade with the US and how they sterilize their surpluses.
The steepness of the plunge is the largest I have yet observed on this chart in terms of the amount involved. In percentage terms, the reduction is approximately 5.5%.
I know that there are some that would be more than happy to jump on the bandwagon and attribute this to the outbreak of tensions surrounding the Ukranian crisis and all the chatter ( baseless in my view ) that Russia, even China and some throw in India, are threatening to dump US Treasuries as a way of waging a sort of financial warfare with the US should the West proceed with sanctions against Russia. However, this trend has been going on since the second week of December of last year, long before things flared up over there. Something else seems to be in play here, although I am unclear what that might be.
If global trade is slowing down, as some fear it will ( myself being among them), I can understand falling Dollar amounts being involved and thus a shrinking need for Treasury purchases for sterilization reasons. That would manifest itself, in my view, as a slower rate of purchases but not necessarily a dropping of the Dollar amount of Treasuries held in custody.
If that is the case AND if some of these Treasuries are maturing, and are not being rolled over in the new purchases, that would explain the shrinking number. It does make me wonder if that recent China data showing shrinking exports from that all-important nation, is indeed having an impact on these Custodial Accounts. This might be SOME of the reason behind the recent Dollar weakness.
Making this more interesting is the fact, that over that same period, from December 19,2013 (when the number of Foreign Central Bank held Treasuries peaked) the Fed has purchased $98.6 Billion Treasuries as part of its ongoing QE program. While not the whole amount, it is still a fairly large number of Treasuries ( about 60% of the total reduction noted above).
The USDX closed at 80.75 on the week containing December 16,2013. Today it closed at 79.62. A little more than a full point but it does seem to me that some of this weakness in the greenback can be attributed to some of that reduction in those Treasury Custodial holdings.
As always, the more we learn of the doings across the global economy and the current financial system, the more factors we have to try to account for in attempting to understand the "why" behind changing money flow patterns.
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