Sunday, September 11, 2005

Foreign Dollar Reserve and Interest Rate

Almost everyone agrees that without the support of foreign central banks, interest rates would have been higher during the last couple of years. The chart shows the relation between YOY increase in foreign dollar reserve growth and 1 year CMT index.
(Click on the chart for a full-size version).

The sharp rise in the interest rate from low-2% level to mid-3% level corresponds to the peaking and subsequent fall of YOY increase in foreign dollar reserves. Note there were a couple of failed attempts and a resistance at low 2 levels. There probably is a correlation in the relative flattening of two lines immediately after the sharp change. It will be interesting to watch how Fed deals with decline in FCB purchases, impact of Katrina and oil shock all at the same time.

Foreign reserve data for the charts came from Federal Reserve web site.

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