international reserves as a key indicator of dollar decline

China has “far more control over the price of the dollar than the US”, says Leigh Skene, an associate at Lombard Street Research.

Although some of the US currency’s weakness since March can be attributed to greater risk appetite and “carry trades”, there is a better explanation for the drop in the dollar, he says.

“Changes in the dollar correlate far more closely to changes in international reserves than any other variable since 1999.”

Increases in international reserves tells us something about exchange rate policy for some countries. Increasing the amount of international reserves will often be associated with a managed float. The central bank is not allowing the exchange rate to appreciate. The aggregate amount of dollar held as international reserves is a function of the amount of dollar outstanding. As reserves increase there is a clear signal that there are more dollars sloshing around the international financial markets, so growing reserves should see a dollar depreciation.