Forex Reserve Trends

The State Bank of Pakistan’s (SBP’s) foreign exchange reserves have dropped by nearly a billion dollars in just eight weeks, from December 13 to February 7. This decline occurred despite the current account posting a surplus of half a billion dollars in December, with expectations of a modest surplus for January. The implication is alarming: financial account payments — primarily government foreign debt servicing — are being routed through the current account, pushing the overall balance of payments into negative territory for January 2025. This marks a concerning start to the new calendar year. The financial account, which includes foreign loans and investments, is drying up. If this trend continues, the SBP may be forced to sustain a current account surplus using limited tools: allowing the Pakistani rupee (PKR) to depreciate further and keeping interest rates relatively high. Should reserve depletion accelerate, import restrictions may resurface as a desperate measure. The federal government’s narrative of economic stability and remarkable recovery over the past year rings hollow to foreign lenders and investors. The financial account report card for the first half of FY25 paints a bleak picture. https://lnkd.in/dQ4YhPUR

A country’s foreign currency (FC) reserve should not be taken at its face value. We need to ask this question - how was the reserve built? A country can build its FC reserve through current account surpluses. A FC reserve built on current account surpluses is solid because the money that represents a current account surplus belongs to the country’s citizens. A country can also build its FC reserves though financial account surpluses. But such a reserve is not so solid because the money that represents a financial account surplus belongs to foreigners. Bangladesh’s FC reserve was at its peak two years ago. But much of it was built on financial account surpluses, i.e., foreigners’ money. One of the reasons the country’s reserve has gone down since then is that the country’s financial account has turned negative, i.e., foreigners have taken away their money from Bangladesh. The recent depletion of the FC reserve has created some concerns in the country. But the good news is that the country has been generating some current account surpluses in the recent quarters. The country’s macroeconomic policies should aim at increasing current account surpluses and build solid, sustainable FC reserves.

The decline of the dollar is not a headline event. It is an accumulation process. This chart shows a slow but persistent shift in how institutions manage reserves. Over two decades, the US dollar’s share of global foreign exchange reserves has trended lower, not because the dollar suddenly stopped working, but because concentration risk has become explicit. Reserve managers optimise for liquidity, safety, and optionality. As US fiscal deficits widen, sanctions weaponisation increases, and geopolitical blocs harden, diversification becomes rational rather than ideological. Even small, incremental reallocations compound over time when applied at the scale of central bank balance sheets. This is not a collapse story. The dollar remains dominant in trade invoicing, funding markets, and global debt. But dominance is being diluted at the margin. Gold, alternative currencies, and bilateral settlement arrangements are increasingly used not to replace the dollar, but to reduce dependence on it. The mistake is to frame this as de-dollarisation versus the dollar. The real shift is from a unipolar reserve system to a more distributed one. That transition is slow, uneven, and largely invisible in the short term. But structurally, it is already underway. The way the world is hedging for this is through buying gold. Source: Bloomberg

India is sitting on $698 billion in forex reserves. Is it a shock absorber or just idle cash? India's foreign exchange reserves rank 4th globally behind China, Japan, and Switzerland. It shows the strength of our economy, but also raises tough questions on how much is too much. That amount of reserves is enough to: → Cover 11 months of imports → Repay 95% external debt → Tackle oil price shocks → Help RBI control rupee volatility → Boost investor confidence & lower borrowing costs With 11 months of import cover versus the IMF’s recommended 3 months, India has a $450–500 billion extra buffer. Reinvesting even part of it could power infrastructure projects, advance clean energy, and set up sovereign wealth funds. The real question is →  Use this money for growth today or keep it as insurance for the future? Deep reserves come with an opportunity cost, but it was also the reason India made it through 2008, COVID-19, and recent global turmoil without major cracks. Sri Lanka’s crisis showed us what happens when reserves run out. In today’s world of geopolitical tensions, rising tariffs and volatile commodities, deep reserves aren’t just a comfort, they become a competitive advantage. For an economy moving from $4T to $5T, these reserves aren’t about being cautious; they’re about being prepared. What do you think about this? Let me know in the comments. #finance #economy #forexreserves #india

💵 Is the Dollar’s Primacy in Jeopardy? For decades, the U.S. dollar has been the bedrock of global finance — dominant in trade, reserves, and capital markets. But in 2025, that foundation is showing signs of erosion. 📉 The dollar has fallen nearly 9% year-to-date, marking its worst performance in over two decades. What’s more concerning? U.S. stocks and Treasuries are declining together, presenting an unusual and alarming signal of waning confidence in American financial leadership. 🌍 Global investors are actively reducing U.S. exposure. Many are bracing for further dollar depreciation, citing concerns over fiscal sustainability, geopolitical tensions, and unpredictable trade policy. 🔁 Meanwhile, central banks are hoarding gold. Large institutional allocators are beginning to diversify currency exposure. And digital assets are creeping into mainstream allocation discussions. The dollar’s dominance isn’t collapsing overnight, but the trajectory is clear. A multipolar currency world is emerging and asset allocators will need to adapt. 🧭 How are Investors Responding? 1. Diversifying Currency Exposure Reducing exposure to USD by increasing allocations to other major currencies and hedging strategies. 2. Adding Gold & Real Assets Gold continues to be a preferred hedge against currency debasement and inflation shocks. 3. Revisiting Total U.S. Exposure U.S. assets may no longer offer the same safe-haven characteristics. Investors are increasingly returning to home country allocations. 4. Considering Digital Assets Bitcoin and tokenized assets are increasingly viewed as part of the future reserve landscape. 5. Planning for a Fragmented Reserve Regime Preparing for a world where global trade and finance is not as dollar-dependent and is more regionally anchored. The shift is gradual, but the implications are massive. Investors that stay anchored to the old order may find themselves behind the curve as these trends play out. #Macro #DeDollarization #CurrencyRisk #InstitutionalInvesting #AssetAllocation #GlobalMarkets #PortfolioStrategy

Pay attention: this is the most important macro chart in the world. Foreign Central Banks have been sending a clear message to US policymakers: we intend to diversify away from the US Dollar. The chart below shows the % of total foreign exchange reserves held in USD (blue), EUR (white) and gold (orange). There seems to be an already ongoing diversification away from USD as the key currency for FX reserves into other alternatives – primarily into gold. But why, and should you be worried about it? 1️⃣ The weaponization of Russian USD FX reserves woke up several other Central Banks to the reality - reserves invested in USD assets are your assets only until the US says so, otherwise they are gone; 2️⃣ The Trump administration intends to change the global trade system, and policies like tariffs reduce the appeal of US assets. For decades, we lived in a world where foreign countries exported into a strong US consumer economy, and recycled back the proceeds into US assets - often T-Bills and US Treasuries. Some countries like Norway or Switzerland went as far as deploying their USD reserves into US equities: decision which led the Norwegian Sovereign Wealth Fund to deliver strong returns. But recently the winds have changed. Global Central Banks are rapidly diversifying their FX reserve buffers away from the USD and into Gold. And the EUR could be a winner too. Now that Germany and Europe have opened up their fiscal purse, there will be much more AAA-rated EUR bonds where foreign investors can park their excess reserves. Couple that with a growth impulse from fiscal spending, and more capital could flow towards Europe. In any case, this is a crucial macro trend to watch. Agree or disagree? 👉 If you enjoyed this post, follow me (Alfonso Peccatiello) to make sure you don't miss my daily dose of macro analysis.

DB | The return of history: gold, the dollar, and the monetary future - Geopolitical fragmentation - not monetary design - is driving a structural shift from USD to gold in global reserves. - USD share has fallen (~60% -> ~40%) while gold has surged (~10% -> ~30%), with flows going primarily into gold. - Emerging markets are the key marginal buyers, with significant room to increase gold allocations from current low levels. - A “return to history” scenario implies gold reaching ~40% of reserves, driven by buying, price effects, and potential FX reserve decline. - This could push gold toward ~$8,000/oz and potentially reintroduce gold as a pillar of a future, less USD-centric monetary system. #gold #dollar #centralbanks https://lnkd.in/d9guF958

Why FX reserve buildup is slow? Central Bank of Sri Lanka purchased USD 1,917 Mn (net), from Sep 2024 - Jul 2025. However, FX reserves are up only by 188 Mn. CBSL Governor: This is mainly due to debt servicing; • We started repayments post debt restructuring • CBSL is repaying USD 2.6 Bn swap with RBI • Govt. is settling the credit line with India • Debt service payments are now (relatively) higher • Certain expected (projects related) inflows have seen a delay Despite the repayments, reserves have been rising, albeit slowly.

On the occasion of the UBS 30th Reserve Management Seminar in Switzerland, our annual survey revealed key insights from reserve managers worldwide. Here are some highlights: —Economic/Financial Outlook: Central banks are positive about the global outlook. Two thirds (66%) of the respondents see a soft landing as the most likely scenario (only 11% believe that the US will suffer a recession). —Geopolitics: Geopolitics remains the top risk, but public debt sustainability is a growing concern. Climate change and overall financial stability are not perceived as major concerns. Nearly all the respondents believe that the world is fragmenting and that we are moving to a multipolar system. The weaponization of FX reserve a growing concern. —US Elections: A Trump victory will lead to more geopolitical confrontations with a further escalation in the relation with China, a weakening of NATO and an increase in global protectionism. On the economic front, a Trump’s victory is expected to lead to lower interest rates, higher public deficit levels and higher equity prices. —Asset Allocation: The trend towards more diversification of reserves resumed after the pause of 2021-23. Reserve managers remain well diversified across public markets. Bonds including Government bonds and in particular Green Bonds are the asset classes that reserve managers want to own more in the future, followed by Equities and Gold. —Currencies: The USD remains in demand and there are no visible signs of a weakening of its dominant position in FX reserves. Nearly half of respondents believe that the shift to a multipolar system will not affect the dominance of the USD in the global financial architecture. Allocations to RMB stagnated in 2023/24 and the average allocation to the Chinese currency fell to around 5%. In terms of future currency allocations, the EUR appears to be more in demand followed by the USD, the RMB and the Yen. —80th Bretton Woods Anniversary: 67% indicated that the Bretton Woods institutions are at risk of becoming obsolete without reforms. Only one third (33%) believe that the current international financial architecture is resilient enough to survive current challenges without reforms. The reforms should focus on the future of multilateral cooperation in a fragmented world. A large majority believes that disruptive technologies such as digital assets and the rise of new economic powers provide more opportunities than challenges. For further insights, check out the full survey results at the link below. https://lnkd.in/enuWbN42  #RMS2024 #Macros #Centralbanks #Assetallocation #USD