FX interventions to curb dollar strength feed its rise

July 12 (Reuters) – Currency interventions aimed at curbing the dollar’s strength are feeding its rise because most central banks selling dollars to limit big drops in the value of their currencies are loathe to see their currency reserves depleted and so are buying those dollars back.

When emerging market central banks sell dollars it’s versus less high profile and less traded currencies, but when they buy them back it’s versus the most liquid and popularly traded currencies like euro, yen, pound and yuan.

The selling of dollars attracts much less attention than the subsequent reserve rebalancing that has a big impact on sentiment, supporting the dollar for a bigger audience.

Those intervening could let reserves drop but they were built up in order to protect emerging markets currencies against past shocks. Should reserves drop, these illiquid currencies may come under greater pressure. Since they are prone to big movements that’s an eventuality central banks want to avoid, so the cycle of intervention feeding a dollar rise should continue.

(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)