Foreign Central Bank Dollar Purchases Continue To Accelerate
In the week ending June 26, the year over year increase in dollar assets held by the Fed on behalf of foreign central banks was $347 billion. As I reported the last time, that increase had accelerated to $389 billion by the week ending August 6. Yesterday it was reported that this increase had accelerated to $426 billion in the week ending August 27. Add to this the original increase of nearly $30 billion per month, and foreign central banks are now financing the entire U.S. trade deficit and more. While this is not the only reason for the dollar rally, it is certainly one of the more important ones.
It is interesting to note that the entire acceleration in dollar asset is in Treasuries. In the week ending June 26, the increase in Agency debt (meaning Government Sponsored Enterprises like Freddie and Fannie) was $225 billion, a number that in the week ending August 27 had fallen to $197 billion. By contrast, the increase in holdings of Treasuries had accelerated from $122 billion to $229 billion. This is something that would explain the widening yield gap between Treasuries and Agency debt.
Foreign central banks sure seem to like Treasuries. With that kind of demand from other governments, the U.S. government is having no problem in financing its deficit. As long as this demand continues, the dollar will also likely remain strong. When that demand wanes, however, the dollar will likely fall again.