Fueled by Europe’s debt crisis, foreign bank deposits at the U.S. Federal Reserve have more than doubled since the end of 2010, cementing the dollar’s status as the world’s reserve currency.
Foreign deposits at the Federal Reserve rose from $350 billion at the end of 2010 to $715 billion in less than a year. Forty-seven non-U.S. banks held balances of more than $1 billion at the New York Fed as of September 30, up from 22 at the end of last year.
The dollar has appreciated 7.2% since Standard & Poor’s cut the U.S. credit rating on August 5. In the developed world, only Japan’s yen has fared better.
While the euro has been undermined by the region’s sovereign debt crisis, and Swiss and Japanese governments have been buying billions of dollars to weaken the franc and the yen, investors have been seeking safety in the world’s largest economy.
“There’s not anything close to a substitute and part of it is the deepness of the market, the liquidity,” said Jack McIntyre, a fund manager who oversees $23 billion in debt at Brandywine Global Investment Management. “There’s a perception, right or wrong, that we’re going to make good on all of our assets.”
Foreign demand for U.S. assets grew at its fastest pace in 10 months in September. Net buying of long-term equities, notes, and bonds totaled $68.6 billion in the last month of the third quarter, the highest since November 2010, compared to $58 billion in August.
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The dollar has risen 6.5% in the past three months, climbing 1.7% to $1.3525 per euro in the five days ending November 18. It fell 0.4% to 76.91 yen. Today, the dollar was trading at $1.3447 per euro and 76.90 yen as of 10:52 a.m. London time.