I just read through an interesting article about foreign bank holdings at the Federal Reserve.
- Foreign reserve holdings have doubled in 2011 (to the tune of a whopping $473B) while holdings by US banks have remained steady
- European banks likely behind the move
- Two theories: 1) liquidity hoarding 2) fear of counterparty risk
- In the credit crisis, evidence shows factor #2 was the driver in a similar flight
- QE2 made it easy to increase reserves
With QE3 at least a couple months away, a renewed demand for dollars (which appears to be already underway) could spark a major USD rally, at the expense of the euro.
