US central bank policies affecting global reserves

Updated: October 30, 2009

Monetary policies of various nations play a key role in influencing the worldwide economies and consequently the international financial markets. Current central bank policies are increasingly looking forward at diversification and are shifting their reserves that are weakening dollars in comparison to euros and yen.

The weak U.S. currency poses threat for the world strategists. Nevertheless, it supports the Obama administration efforts to boost up the exports, as commodities are less expensive beyond the national borders. This in turn will improve the national employment rate. On the other side of the coin, imports will be costlier for the consumers in U.S. economy. From asset manager's perspective, they might hold less of dollar assets. In addition, according to the trading model created by Barclays, there is an opportunity for investors to grow richer by following the central banks' moves and trade the dollar depending on shift in global reserves along with other economic variables.

Considering the economic cycle, dollar is under downward pressures that might continue beyond 2010. This downward trend in dollar might have disastrous implications on global financial markets and could squeeze U.S. economy if BRIC economies decide to desert it. However, the central bank policies to move away from dollars give the impression of being impermanent until the interest rates are lifted up from near zero. Imposing higher rates by the global bonds market on U.S. economy could only lead to interest rates boost in U.S. economy.

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