Recently, China has reduced its dollar reserves, but the
Asian nation still has in its ranks a gigantic treasure chest of US currency.
It should be clarified here which countries carry much greater quantities of
the US currency and what impact this has on the global economy. What position
Forex plays in this should also be considered.
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Forex? Why is that important?
The first thing to do is to explain what trading in Forex is
and how it works. All transactions that revolve around the purchase and sale of
foreign currencies are referred to as the foreign exchange market or forex for
short. This is already part of the chaos in the currency markets, even though
you swap your euro for another currency before your next trip to Denmark.
International currencies are essentially foreign currency
designations. You can now buy these foreign currencies in so-called lots from a
dealer - uniform units - (usually 100,000 units). Using the trigger, it is
likely that on average, the investor just needs to deposit between 0.25 and 5
percent of the traded volume. The remainder is given by the broker.
When the funds on the deposit are used up, the broker
immediately closes the trade. This implies that private individuals may also
engage in Forex with reasonably low risk. According to Statista, from just
under US$ 1.2 trillion in 1995 to almost US$ 5.1 trillion in April 2016, the
amount of sales that are transferred every trading day on the foreign exchange
market has risen. This makes the largest and most liquid stock market in the
world, the Forex market.
Payment transactions are in US dollars
In the global economy, the US currency has for decades been
the undisputed reserve currency. The dollar is involved in over 87 percent of
all foreign exchange transactions, according to a report by the Bank for
International Settlements (BIS).
Global trade, meanwhile, is also overwhelmingly in dollars.
Although Europe is three times as involved as the US in trade with the world,
Europeans must repeatedly turn to the American currency for their exports. The
so-called Swift statistics, which display foreign payment transactions, confirm
this. It reveals that the dollar accounts for 44 percent of foreign payments at
present. He drew or still draws a large part of his strength from exactly this
consistency.
The value of the dollar has a significant effect on the
global economy as a whole. If the FED raises the main interest rate, the demand
for the dollar worldwide will increase. This implies that capital flows out of
the emerging markets and causes volatility there.
In particular, if you have made an economic mistake and
borrowed money in a foreign currency, in this case in dollars, there is a high
chance of having trouble paying off your debt. The appreciation is twice as
painful if the economy then struggles as a result of the outflow of money. In
the past, such an increase has only occurred twice, and at the end of this
year, a further increase in the US main interest rate may follow.
Countries by currency reserves or importance for the Forex
Although global foreign exchange reserves peaked at $11,685
trillion in 2013, they have dropped by nearly 10 percent since then. In 2016,
it was just $10.715 trillion.
The following countries hold the largest currency treasures
in their possession, according to the data prepared by Statista and provided to
the International Monetary Fund for February 2017.
Currency reserves are assets of a central or issuing bank in
foreign currencies, in precious metals, in special drawing rights, or in
reserve positions in funds kept by the IMF to manipulate the currency market or
cover foreign trade deficits.
Global foreign reserves were just 10.8 trillion US dollars
five months ago instead of 11.06 trillion before, according to data from
Reuters and the IMF. The US dollar share is just over 63 percent, which is
equal to about 4.94 trillion in value. Around one percent is the Chinese yen. The
euro makes up about 19.7 percent of the foreign exchange reserves.
Since 2010, China has been number two on the list of
economies. In 2014, in
terms of purchasing power, China also overtook the US. It has $ 3,2999 trillion
in foreign exchange reserves, except Hong Kong. Economic growth is set at
approximately 6.5%.
In the Middle Kingdom, the economy is highly
export-oriented; in the past twelve years, foreign trade has risen by more than
1000 percent. China is home to the largest container port in the world with
Shanghai and, without Hong Kong, is described two more times in the Top 10. In monetary policy, this
results in tension. A too powerful yuan makes exports more costly and causes
the export of goods to fall.
A yuan that is too poor is risky for the country's economy.
International investors withdraw their money if the value is
too low. Currently, the Chinese government is seeking to boost the national
currency against the dollar. To compensate for the fact that more and more
Chinese citizens decided to diversify their assets and among other things,
accumulated huge quantities of dollars, the Chinese central bank had to sell
foreign currency reserves.
To prevent the yuan (renminbi) from devaluing too much
against the US currency, this move was appropriate. The government wants to
completely open up the currency for trade by 2020 and expose its value to
supply and demand powers.
Shortly, state-owned companies are projected to be more
market-oriented and more innovative, to broaden the country's value chain, and
to specialize in strategic technologies such as information technology, biotechnology,
or aerospace technology. Furthermore, the "green economy" and robot
technology should be extended and supported.
However, it is still important to strengthen the investment
conditions for foreign actors. However, talks are currently underway with the
EU on a substantive investment agreement.
Japan, the third-largest economy in the world, holds In currency reserves, 1.2969
trillion, comes second.The highly export-oriented nation must also ensure that
against the dollar, the yen does not appreciate too much. This will make the
island nation's goods more costly and impact almost the whole Japanese economy.
In the areas of research, growth and manufacturing,
electronics, machinery, automotive engineering, and the chemical industry, it
is one of the world's strongest. That is why the monetary policy of the country
is always careful to support, by weakening the yen, the export market. This
dependence would continue to exist, given demographic growth and poor domestic
demand.
On the Japanese stock exchange, a devaluation of the yen has
only led to price rises. The export companies were as was to be expected,
especially in demand. Before that, the yen's ten-month high against the dollar
had triggered worries about the company's profits there. Among other items, the
slight relaxation of North Korea and the decline of Hurricane Irma helped. The
dollar had its lowest value since the beginning of 2015, a week earlier. The
chaotic political situation in the USA is one of the reasons for this.
The money supply about GDP reached about 80 percent in 2016,
thanks to a scheme to buy Japanese government bonds amounting to 700 billion
euros annually since 2014. This figure is around 20 percent in the EU and
around 21 percent in the USA. After hitting its high of US$ 206 billion in
2012, the amount of foreign direct investment dropped again to about US$ 170
billion in subsequent years. Overall, however, Japan benefits from Asia's entry
into the global market and the strengthening of developing countries. The
monetary policy of Japan and its outstanding position in the world market
ensure that the JPY, together with the USD, is the second most widely traded
currency pair with a forex market share of 13%.
There is already 0,7138 trillion US dollars on the credit
side of the IMF in Switzerland. The Alpine Republic's unemployment rate is a
low 3.3 percent and the inflation rate is -0.4 percent. The country is
characterized by the banking sector and export-oriented, specialized industry.
Moreover, it also makes a large income from selling raw materials.
Following the lifting of the 1.2 CHF per euro price relation
to the euro in January 2015, the franc soared. The export industry and tourism
were hit hard by this. It even achieved parity against the euro at times. In
particular, the powerful euro bothers him. Because of the stable euro area
economy and Draghi's declaration that he plans to discontinue the ECB's
economic and securities buying program, the tide has changed.
At present, the Swiss franc has hit a low point and there is
a call for 1,14 francs for a single euro. For example, watch manufacturers
Swatch and Richemont, who sell a large part of their products internationally,
profit from this in turn. Other specialist industries benefit from better
export markets, such as those for medical precision instruments or those in the
electrical industry.
For foreign investors, on the other hand, Switzerland is
also a safe bank. This status may be jeopardized if the franc weakens too much.
Companies manufacturing or purchasing in the EU are also finding it difficult.
As a consequence, for them, expenditure increases and productivity suffers.
Last but not least, Switzerland's people are affected. For them, papers from
abroad or holiday trips would be considerably more costly than before.
However, Switzerland benefits from the fact that the
variations in the exchange rate against the euro are helped by the fact that
large Swiss stock-market fish, such as Roche, Nestlé, and Novartis, account for
a large proportion of their income in US dollars. As a result, there was a net
foreign trade surplus of about 37 billion Swiss francs in 2016.
Saudi Arabia ranks fourth after Switzerland. It is the Arab
world's largest economy. It has roughly $0.4929 trillion in foreign exchange
reserves. Saudi Arabia is one of the major producers of petroleum and the
largest oil exporter in the world. Since oil is historically traded in US
dollars, the economy of the country is highly dependent on the world reserve
currency rate.
Last year the government's deficit was more than EUR 90
billion. That is why last year the ambitious "Vision 2030" reform was
unveiled. It is important to diversify the economy and to sell 5 percent of the
state oil company. The remainder is to be absorbed into the sovereign wealth
fund, which will then expand to be the world's largest. Among other things, it
is important to manufacture its plants for the development of renewable energy
sources, reform the education system, gradually incorporate women into the
labor force, and much more. In this way, even after the oil wells dried up the
economic future of the desert state will be assured.
The Crown Prince wants his nation to become independent from
oil in twenty years and to make it a big global investor. To this end, more
locals, i.e. migrant workers, have to be absorbed into the labor market, which
is now dominated by about nine million ex-pats.
Next year a five percent VAT will be added as well. It can
be expected that if Saudi Arabia turns away from oil, it will be even more aggressive
in the capital markets, most likely in the forex market as well.
In currency reserves, Hong Kong holds $0.4202 trillion. High
foreign exchange reserves are largely because Hong Kong is one of Asia's most
significant financial centers and has the world's fourth-largest container
port.
In an extremely service-oriented economy, the unemployment
rate is 3.5 percent. 90% of the gross domestic product is accounted for by the
service sector, and every second employee is working in commerce, banking, logistics,
or related industries.
In addition, tourism also plays a significant role. Hong
Kong's currency is pegged to the US dollar.Therefore, it is only in the small
currency market, which accounts for only about 10% of the foreign exchange
market.
Most recently, the inflation rate was 2.4 percent. Also,
Hong Kong is the most significant source of foreign investment and provides
companies from mainland China with access to debt capital. In 2016, Hong Kong
was the second-largest target market and the third-largest source of direct
foreign investment.
With a backup of $0.403 trillion, Russia follows closely
behind. Russia also has some foreign exchange reserves, accumulated primarily
by the trade of commodities. The Russian economy is not so focused on the
export of finished products that it produces 50 percent of its gross domestic
product in the trade or service sector.
Moreover, raw materials, particularly oil and gas, are
mainly exported, most of which are traded in US dollars. Just about 15 percent
of GDP is in the manufacturing sector. In the recent past, to compensate for
the depreciation of the ruble, Russia has regularly sold huge quantities of US
dollars.
Russia had to part with US securities on a wide scale after
the oil price dropped to $26 in early 2016, the Russian economy crashed and the
ruble fell to an all-time low. The West's sanctions have made the situation
even worse. Now the price of oil has risen again recently and is now back in
the region of 50 dollars.
As a consequence, the creditworthiness of Russia has
strengthened immensely again. The ruble also rallied, so there could almost be
fear that the hesitant recovery would be slowed down. Russia has been able to
extend its US bonds back to just under 100 billion US dollars in two attempts
after Trump was elected US President in November last year.
Furthermore, Russia has recently managed to get around the
free market sanctions. Russia sold $3 billion in government bonds at almost
twice the rate of interest owed on US debt.
Now that the markets have restored confidence, it is
possible to talk about resolving the crisis. This should not, however, mask the
fact that Russia relies heavily on its raw materials and that there is an
urgent need for significant structural reforms.
Next is South Korea, with a value of US$ 0.3739 trillion.
The position that exports play in the country cannot be overestimated for
producers such as Samsung, Daewoo, Hyundai, and LG, which are based in the
tiger state.
As a result, to keep the rate of the Korean won low against
the US dollar, the country needs to be able to control the foreign exchange
markets. There was also no significant effect on the local economic situation
from the diplomatic tensions across the Korean peninsula.
Within the last few weeks, the victory has scarcely moved.
Global investment, however, dropped 41 percent in 2016 to $ 9.8 billion. In the
Republic of Korea, there are currently about 7500 foreign companies working.
International trade also dropped by 12.3 percent in addition to savings.
This is followed by Brazil, with currency reserves of at
least $0.369 trillion. It is also part of the BRICS countries and one of the
world's biggest developing countries. The country is suffering from low prices,
especially for oil, because of its abundance of raw materials.
There is also hope that consumption in the country will
increase slightly again, given the 18-month low in the inflation rate. The
economy is getting better and the recession is hopefully over. The explanation
for investors' loss of confidence and the resulting severe recession was due to
a wide budget deficit that resulted from subsidies and increased government
spending.
The domestic market is the most critical, with 200 million
inhabitants and a foreign trade share of just 20 percent. Unemployment has
risen to 12 percent there though. Industry, which has been grappling with
shrinking demand since 2014, is the biggest weak point in the economy. As a
consequence, the nation is not benefiting from its currency's low value.
This value rapidly recovered in the years that followed,
after Brazil had a negative foreign trade balance for the first time in more
than ten years in 2014. While overall trade volume has decreased, since records
began in 1980, Brazil reported its highest surplus.
The situation concerning foreign investors changed again in
2016. US$ 79 billion in direct investment has flown into the country.
With a balance of $0,3669 trillion, the seventh-place went
to India. The nation is one of the fastest-growing economies in the world and 7
have been published. Economic growth of 1 percent in the 2016/2017 financial
year.
Similar numbers are expected this year. India is presently
one step ahead compared to the other BRICS countries. Inflation on the
subcontinent has declined from almost 10 percent to 3.5 percent between 2014
and now. India has seen significant growth in foreign investment because of the
dedication of the Modi government to a market economy.
They hit a height of 40 billion US dollars between April
2015 and March 2016. Between 2000/01 and 2015/16, the share of foreign trade in
GDP increased from 23 percent to 45 percent. The rupee has recovered against
the dollar after its low point after the November 2016 currency reform and is
now better off than before.
There are transportation deficits in India, but there are
concrete plans to at least connect the economic centers of the country.
Then Singapore, as an asset-side thing comes with at least
0.2533 trillion US dollars. Singapore has the biggest container port in the
world and its infrastructure is excellent. One of the most significant
financial centers in the world is situated on the spot.
Furthermore, there are exceptionally low tariffs in
Singapore and an uncomplicated customs system. Approximately 96 percent of all
products are duty-free and only a limited number of goods require import
licenses. The economy is very export-oriented and therefore highly dependent on
foreign financial market developments.
In particular, the dollar and the euro play an important
role. City-state monetary policy is therefore aimed at controlling exchange
rates, especially against the US dollar. The Singapore dollar has marginally
lost again recently after a long time of appreciation against the US dollar.
The sovereign wealth funds of Singapore are also of great
significance. Firstly, Temasek, which in the last ten years has risen from 164
to 275 billion Singapore dollars. On the other hand, the GIC, officially priced
at US$ 100 billion, but estimated by value analysts to be three and a half
times that number.
Singapore, for investors, is a safe haven. The population is
well educated, the economic atmosphere is very business-friendly, and there is
a stable political situation and currency. Moreover, the SGD Dollar still
offers interest rates in a positive, if very low range.
In eleventh place is the Federal Republic of Germany. She is
also able to rely on a $0.1958 trillion treasure trove. Until 2008, Europe's
largest economy was the world export champion, planning the entire economic
structure accordingly. Global trade makes up almost every fourth worker in
Germany.
The foreign trade quota was at 72.2 percent of the gross
domestic product at the pre-crisis stage in 2015. It is all the more amazing
because when it joined the euro, the nation effectively put its currency policy
in the hands of the European Central Bank. It owes its high currency reserves
to its trade surplus, which since 2014 has been well over EUR 200 billion per
year. It also surpassed EUR 252 billion in 2016 and smashed the record for the
third time in a row.
An end to this growth is not in sight yet. As a country
depleted of natural resources, Germany is also dependent on energy sector
imports. If the dollar were powerful, imports would become more costly, as raw
materials are mostly exchanged in this currency. On the other hand, an overly
strong euro makes exports of products more costly and puts employees at risk.
On the other hand, under the scheme of cheap money and zero
interest rates, private insurance, savings, and social insurance are
struggling. The latter are legally obligated to invest in secure but not very
profitable investments at present. Forex trading will remain the most
significant currency pair for private sector players, after all the euro and
the US dollar.
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The U.S. is the world's largest economy, but it has a
comparatively limited currency reserve volume. This is primarily attributed to
the reserve currency of the USD and has many reasons.
On the one hand, the dollar plays a vital role in the global
economy, as has already been demonstrated. The United States therefore will
trade even more often on the international market with its currency. It is not
necessary to swap other currencies.
Companies benefit from the fact that no costly hedging
transactions need to be performed by them. Nevertheless, in the vast majority
of all foreign exchange trades, the US dollar is involved. With negative
deficits of USD 502.3 billion and USD 552 billion, both the foreign trade
balance and the budget indicate significant deficits. The debt burden of the
state is reportedly a mammoth 20.165 trillion US dollars. With a weak dollar,
they are seeking to compensate for this. That is why China and other nations
are always pressing for the US to appreciate their currencies.
The Fed has also adopted a zero interest rate strategy for
years and put vast sums of money into circulation, thus artificially decreasing
the dollar rate. However, interest rates were boosted in December 2015 for the
first time in nine years.
States rely on a large, well-developed country and the
abundance of raw materials for their economic success. By 2020, the USA wants
to be self-sufficient in terms of electricity. Moreover, with about 324 million
people, the nation has a domestic sector.
The service sector produces almost 80 percent of GDP, the
manufacturing sector accounts for the remainder, and agriculture accounts for 1
percent. The job market has almost hit full employment, with a 4.8 percent
unemployment rate.
The UK also had currency reserves of $ 0.1635 trillion in
2016. London, ahead of New York, Hong Kong, and Singapore, is not only the
capital of the United Kingdom but also the world's leading financial city.
In the field of derivatives and foreign exchange trade,
London is a world leader. The British pound also accounts for 11.6 percent of
foreign exchange trade, along with the dollar. The financial sector is
overwhelmingly deeply entrenched, with a value-added share of 11 percent.
Actually, not even the looming Brexit seems to jeopardize this role.
In general, the country is characterized by the service
sector, with a 79 percent share of GDP. Here, in particular, the financial
sector plays a key role. However, the British economy does not need to hide in
the world market in many high-tech regions. These include telecommunications,
information technology, defense technology, construction of automobiles,
electrical engineering, biotechnology, and the pharmaceutical and chemical
industries. However, 14 percent of GDP is still contributed by the
manufacturing sector.
Nevertheless, the jobs rate in autumn 2016 hit a record high
of 74.5 percent. At pre-crisis peaks, the unemployment rate is currently below
5 percent. The traditionally very strong pound has been plummeting since the
Brexit referendum.It has lost a great deal of its value, especially against the
euro. It was as poor as it was in March 2010, the last time. The 2.6 percent
inflation rate was just announced.
So far, however, no new impetus has been given to the
economy by the weak currency and exports have not risen as strongly as in
previous periods of weakness. Despite the Brexit announcement, slight economic
growth was reported, but this was due in part to higher consumption, which was
partly financed by credit.
The United Kingdom has for decades had a deficit in
international trade. The deficits in the exchange in goods cannot be accounted
for by the surpluses in the balance of services. The deficit was $ 226.37
billion last year.
In terms of currency reserves, Australia is not that
relevant, but the currency pair between the US dollar and the Australian dollar
is the fourth most traded currency pair on the foreign exchange market. It
ranks 37th among the countries with the largest currency reserves, with only
49,265 billion euros.
In return, for the longest time without a recession, the
nation holds the world record. The economy has developed for more than 26 years
in a row. 70 percent of GDP is accounted for by the service sector, including
education and finance, tourism, real estate, and business services.
While agriculture and mining only account for 2% and 6% of
GDP respectively, they account for 70% of exports together. In recent years,
however, falling commodity prices have left their mark, as iron ore, coal,
natural gas, and gold are the country's main export products.
As a consequence, in the third quarter of 2016, there was an
unforeseen recession and there are rising indications that the economy could
somewhat cool down. For example, by October 2017, the production of cars will
be completely discontinued. For the supply firms, this would also have huge
implications and the already declining number of workers in the manufacturing
sector will continue to decrease.
40,000 jobs are likely to be eliminated, some of which would
be replaced by building up a leading weapons industry. To offset the AUD
appreciation, at the beginning of August 2016, the central bank reduced the
main interest rate to 1.5 percent, which is the lowest level ever. However
because the commodity markets have recovered, there is no expectation of a
further fall in interest rates.
Canada is the 11th largest economy in the world, but it does
not have strong currency reserves, at 83.13 billion US dollars. This is unique
in that exports, especially to the USA, are heavily dependent on all branches
of the economy.
Low oil and natural gas prices also have a negative effect
on economic development and the national budget as a country with the
third-largest oil reserves in the world. A large number of jobs have been lost
in the most critical oil province of Alberta, as a result of the decline in oil
prices. Canada still has a powerful and future-oriented economy, however.
The divisions of the automotive industry, aircraft
construction, wood, and paper processing, the chemical industry, and also
information and communication technology should be listed in the manufacturing
sector. Canada, however, suffers from a shortage of qualified staff, which has
a negative effect on the location of the industry. The economy is also burdened
in some cases by the barriers which exist between the provinces.
In the construction industry, for example, non-provincial
enterprises are disadvantaged or technical qualifications are often not
recognized. Although Canada is a nation of exports and a free market, foreign
investment in key areas has been limited. It is widely touted for international
financial injections in other regions.
The main investor is the USA. As already stated, raw
materials, metallurgical and chemical products, vehicles (parts), machinery,
and fishery and forestry products are Canada's most important export goods.
On the other hand, imports were primarily machinery,
vehicles, and consumer goods. The neighbor in the south is also responsible for
80 percent of exports. The United States is Canada's most important partner in
trade. This explains, among other items, the place on the foreign exchange
market of the CAD / USD currency pair. This is the fourth most-traded
constellation, with a 5.6 percent share of the trading volume.
Conclusion
Economies have very different preferences and aspirations
for exchange rates because of their economic systems. As a consequence, they
must always realign themselves to one another. As Russia and China have
demonstrated in the recent past, the forex provides a strong change screw in
the hands of the monetary authorities.
It is possible to monitor reasonably precise investor flows
and export performance through exchange rates. States can not only steer their
fortunes in this way, they can also cause turbulence at the other end of the
globe through global interdependence.
It remains to be seen if, soon, the BRICS states will shake
the US dollar's global supremacy. The signs are rising that something is
happening and that solutions are being pursued. In the long run, many states
are no longer able to fund the United States beyond their means for their
lives. However, as long as the yuan is not open to trade, major investors would
not be able to invest their money in secure alternatives to the dollar.
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