Governments and central banks are burning through their cache of foreign reserves at an unprecedented speed as the world faces a new and highly tense landscape of geopolitical tensions.
In Oct. 5 reporting by Bloomberg, the outlet found global reserve currency war chests have fallen by almost $1 trillion in Q2 and Q3 of this year alone, based on data the outlet self-collects.
The figures far eclipse the drawdown found during the 2008 financial crisis of less than 200 billion in each of two quarters, while Q2 and Q3 2022 posted greater losses than the highest spike seen since 2011 of 400 billion, which occurred in one quarter when the pandemic began.
In specific examples, Bloomberg notes that India has lost $96 billion in reserves this year, falling to $568 billion.
Part of the expenditure is central banks defending their currency from what some commentators have dubbed the “USD Wrecking Ball,” as the strong US dollar index has raged from 90 cents in June of 2021 to a peak of slightly less than $1.15 last month as both U.S. and other global equities markets printed new yearly lows.
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For India, this has resulted in its currency losing close to 10 percent of its value against this dollar this year, opening 2022 at an exchange rate of approximately 75 rupees to 1 USD. It currently trades at slightly less than 82 rupees.
But arguably the worst and also most significant economy hammered by the wrecking ball is the Japanese yen, which has lost more than 40 percent against the dollar.
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The yen opened the year around 103 yen to 1 USD and currently trades at slightly less than 145 to 1.
The September devaluation was so parabolic that the Japanese Ministry of Finance was forced to intervene in the market after the currency shrunk approximately 7 yen in only five days.
The government and the Bank of Japan blew $20 billion USD to repurchase its own currency on Sept. 22 after USDJPY hit 145.901, causing a flash crash back to 140.715 in less than 45 minutes.
However, the expensive reprieve was nothing more than a momentary vacation as the yen traded back to 144.904 just three days later.
Bloomberg stated that the gamble accounted for a massive 19 percent of Japan’s 2022 foreign reserve drawdown.
Axel Merk, Chief Investment Officer of Merk Investments, warned Bloomberg readers somberly, “This is all part of the catalog of symptoms of the canary in the coal mine…Cracks are showing up. And those red flags will come at an increasing pace.”
But the situation may not be as dire as headlines make it out to be, Bloomberg notes as it points to the key caveat, “Foreign reserves in India are still 49% higher than 2017 levels.”
But adds that those levels are still only “enough to pay for nine months of imports.”
For less privileged countries, such as Pakistan, “After declining 42% this year, Pakistan’s $14 billion of reserves aren’t enough to cover three months of imports.”
These points are highly significant, as the case of Sri Lanka shows.
The island nation, which sits off the Southern coast of India and is home to 22 million people, fell into chaos earlier this year when its foreign reserves were completely depleted, leaving the nation unable to purchase oil or other supplies, which generally require the U.S. petrodollar.
Sri Lanka primarily only exports tea to Russia and relied on tourism and sending workers abroad to mine currency to send back home, areas hardest hit by the Ukraine war and global lockdown measures from the Coronavirus Disease 2019 (COVID-19) pseudo-pandemic.
The situation became so strained that after the government banned the sale of gasoline and liquified petroleum gas — a version of propane citizens rely on to cook and heat their homes with — to the public, rationing it for public services, rioters raided the Presidential Palace and burned the President’s home to the ground in July.
The aftermath of the economic and political instability led to the mass deployment of a social credit QR code system under the pretext of fuel rationing.