Central banks are intervening to prop up currency reserves

Central banks from India to the Czech Republic are intervening to support their currency, and the global foreign-currency reserves are falling at the fastest rate on record.

The biggest drop since Bloomberg began to compile the data in 2003 has resulted in a decline in reserve prices by about $1 trillion, or 7.8%, this year.

The valuation changes are a cause of the slump. As the dollar jumped to two-decade highs against other reserve currencies like the euro and yen, it reduced the dollar value of the holdings of these currencies. The dwindling reserves also reflect the pressure on the currency market that is forcing a growing number of central banks to dip into their war chests to fend off the depreciation.

India's stockpile has dropped $96 billion this year to $538 billion. The country's central bank said that asset valuation changes account for 67% of the decline in reserves during the fiscal year from April, implying that the rest came from intervention to prop up the currency. The rupee has lost 9% against the dollar this year and hit a new record low last month.

Japan spent $20 billion in September to slow down the yen s slide in its first intervention to support the currency since 1998. That would account for about 19% of the loss of reserves this year. Since February, a currency intervention in the Czech Republic has helped drive down reserves by 19%.

Axel Merk, chief investment officer at Merk Investments, said that this is part of the catalog of symptoms of the canary in the coal mine. Cracks are showing up. The red flags will come at an increasing pace. Read more: Korea's foreign reserves have fallen most since the global financial crisis.

While the magnitude of the decline is extraordinary, the practice of using reserves to defend currencies isn't new. Central banks buy dollars and build up their stockpiles to slow currency appreciation when foreign capital floods in. In bad times, they draw on reserves to soften the blow from capital flight.

Some countries, particularly in Asia, can go both ways, smoothing weakness and pockets of strength, said Alan Ruskin, chief international strategist at Deutsche Bank AG.

Most central banks still have enough firepower to keep interventions going if they choose to. Foreign reserves in India are still 49% higher than 2017 levels, and enough to pay for nine months of imports. Central banks, including those from Indonesia, Malaysia, China and Thailand, will release their latest foreign reserves data on Friday.

They are quickly depleting for others. The data from Bloomberg shows that Pakistan's $14 billion of reserves isn't enough to cover three months of imports after declining 42% this year.

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