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FX WORLD CURRENCIES al location is nearly complete.


Before shifting gears, we should note


that overal l the reserves


fel l the second consecutive quarter. This sounds counter- i n t u i t i v e. Wasn't dol lar


firm


in Q2 and Q3? What seems not to be widely r ec o g n i z ed , reserves tends to rise when the


is weak, not


dol lar strong.


Central banks intervene and a c c umu l a t e foreign assets t y p i c a l l y when their c u r re nc i e s are strong. If, on, the other hand, their currencies are weak and intervention is conduction, the reserve asset is liquidated.


An implication of this is that overal l


reserves are likely to


rise when the dol lar is weak and fall when the greenback is strong. This hints at some of the dynamics at work that links a strong dol lar to heightened financial tensions.


64 FX TRADER MAGAZINE January - March 2019


When looking at the currency al location itself, there are three elements of change, portfolio decisions, valuations, and the reporting of China's


al location. The


quarters of the year, central bank holdings of euros increased by $183 bln to $2.192 tri l lion. Most of this increase likely ref lects China's admissions. Valuation shifts may


have


played a minor role. Year-to- date, the euro is off about 4.7% against the dollar.


The dollar value


reserves of


C hin e s e yuan held in


The most important development has been China's agreement to report its currency composition to the IMF


dol lar holdings themselves are not subject to valuation shifts. The amount of dol lars held by central banks has never been higher.


It stood at $6.631


tri l lion at the end of Q3 18, a $350 increase since the end of 2017. Overall reserves fell by $43 bln over the same period.


The euro is the second most important reserve currency. Through the first three


dipped nearly half a billion dollars in Q3 to $192.538 bln. This most


ref lects


likely the


3.6% decline in the yuan


against the dollar. There had been a sharp rise yuan holdings earlier in the year. Yuan


reserves rose by $69


bln in H1 18. The one thing this cannot be impacted by is China's allocation. However, some suspect that this could help explain what happened to Russia's Treasury holdings, which fell from $102.2 bln at the end of 2017 to $14.9 bln at the end of H2 18. If it were


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