China's economic situation is certainly having an effect on global currencies. Analysts say that the fluctuations in the third largest economy is drawing on its foreign-exchange reserves to such an extent as to lead to inflated price swings in currency markets around the world.
In order to bolster the yuan, the People's Bank of China cut its holdings by the most ever last quarter burning through close to half a trillion dollars since the middle of last year. This is equal to twice the size of Greece's entire economy.
After spending years building up its holdings, China reduced its reserves by a record $179.7 billion in the three months ending September, bringing the decline since it started cutting in July 2014 to $480 billion, or 12 percent of the total. This drain on its reserves has caused severe swings in global exchange rates and central banks in other developing countries are following China's lead amid the possibility of a dollar-boosting increase to U.S. interest rates. Its holdings remain at $3.5 trillion, which are still the world's biggest.
Fluctuations To Continue
Analysts see the fluctuations as continuing unabated and view the situation as an opportune time for currency traders to make money. However, troubles do exist especially from China and other Asian countries. New Zealand's dollar plunged briefly in late August, the most in 30 years but has since bounced back slightly. The Bank of Russia has burned through about $160 billion, or a third of its reserves, over the past two years to support the ruble, which still sank to an all-time low in December.
Currency swings can also be positive–note Malaysia's ringgit which strengthened the most since 1998 on Wednesday as the nation reported a bigger trade surplus.
Central banks can use dwindling reserves to their advantage by strengthening price swings in global currencies. Seven months before China's devaluation, the Swiss National Bank scrapped its exchange-rate peg, sending the franc soaring to a record and causing other currencies to be re-evaluated.
