Foreign reserves increasing

Foreign exchange reserves have increased another $28 billion last month to $2.93 trillion. The central bank foreign reserves are just under all time highs of  $2.97 trillion.

The purpose of these strong reserves are clear. Be prepared to stop currency appreciation associated with an ongoing weak dollar. Buy dollars to make sure that currencies levels do not get too high. If there is a run on the short-term lending which leads to currency depreciation or that increases volatility, the reserve can be used to buy-back the currency and stop any hot money funding problem.The use of large foreign currency reverse began after the Asian crisis in 1998.

So much for freely floating exchange rates. Central banks do not really like market determined rates. They do not trust market prices. They trust that bubbles and excessive volatility are more likely to occur in these markets. Currencies should not be trusted to market players. There have have been examples of extremes and hot money, but that has been the exception not the norm. close to $3 trillion in insurance funds against large market moves may be excessive.