Eurodollars Update From the Dec 2012 BIS Report

This is from the Dec 2012 BIS Report, which includes data up to June 2012.

As you may recall, the Fed's M3 Money Supply figures had included Eurodollars as a component.

The second chart represents the liabilities versus assets of foreign banks in their dollar holdings. I have related this to the eurodollar short squeeze in the past.

Eurodollar Update - Hunting The Black Swan - Gold and the Eurodollar

As you know eurodollars are US dollars held anywhere overseas by banks as a foreign currency liability or asset.

Eurodollars were formerly tracked by the Federal Reserve and were included in their M3 figures. In fact, the reason that the Fed stopped issuing its M3 is because it stopped tracking eurodollars. The other components remain.

But the Bank for International Settlements, or BIS, continues to track the dispersion and concentration of global currencies in their reporting banks in their quarterly reports. And this is the source I have been using to derive estimates in the magnitude and changes in dollars held overseas.

Based on my reading of their documentation these figures do not include 'official dollar reserves' of central banks, but rather the dollar holdings as foreign currency of their reporting private credit institutions.

From what I can tell, there is a definite difference between the Fed's tracking of eurodollars, which was based primarily on the foreign branches of their own member banks, and the BIS, which reports on dollars held by a greater universe of ALL banks around the world.  This seems consistent with the Fed's statement at the time that continuing to continue to track eurodollars reliably would become cost prohibitive.  I am curious as to their seeming lack of ability to exchange and share data with BIS.  I would judge the BIS number to be the superior number.  At the end of the day, dollars are dollars, unless there is a selective default, different currency classes, or some benign accounting notation.  The BIS data have every appearance of legitimate dollar claims.

For more on M3 and eurodollars read here.

Even a casual glance at the data shows that there was a trend change in the growth of eurodollars in the mid 1990's. This trend is something I have identified as one potential source of a US dollar crisis if the currency begins to fall in value or lose its appeal US in an uncontrolled manner.

I have not tracked the actual source of the eurodollar growth although it seems to be tied to the trade deficit and a variety of components in the Balance of Payments.

My current estimate of eurodollars is 2.25 trillion which is not insignificant even in these days of an exploding Fed Balance Sheet.

As an aside, the last time the US repatriated funds held by US companies overseas through a tax reduction program was in the 2005 Homeland Investment Act. That seems to have had no material effect on the level of eurodollars at least judging from the charts, and probably did more to inflate the income of the wealthy and stock prices.

During the financial collapse there was a eurdollar short squeeze, primarily in Europe. This is because the dollar denominated assets which they held against their dollar liabilities because to collapse in value, in large part due to the mispricing of risk and fraud.

The trend to an increase in Eurodollars has resumed after a steep drop after the financial crisis.

In the second chart we can see that the banks overseas have adjusted their shortfall, or 'the squeeze,' in part due to the swap lines that the Fed opened through their central banks to relieve the pressure.

There are correlations between gold, the US dollar, US dollar LIBOR and the related TED spread, and eurodollar demand that I have discussed in the past, particularly here, but also here and here.

Last Official Report on Eurodollars from the Fed was in 2006 when they were just over $400 Billion

US Dollar Very Long Term Chart

Here is an update of the US Dollar (DX) Very Long Term chart last shown on 3 April 2009 when the Eurodollar Squeeze was still abating.

We do not see any reason to change the longer term targets based on what appears to be a confirmation of the continuing decline.



The reasons for this decline are obvious, but so many miss this that we have to wonder what people are thinking. Despite the credit writedowns and even a potential unwinding of the dollar carry trade which we think is a bit overblown, as the demand for dollars in bank lending is slack, most analysts are missing the bigger picture of a huge overhang of eurodollars that are becoming increasingly less useful to foreign holders, especially if the power of the petrodollar declines.

There is a potential double bottom to be made at 71, with a possible target in the higher 80's based on the charts. The fundamental scenario we would see is a significant equity market dislocation and/or an exogenous geopolitical event that caused another artificial short term demand for dollars and the T bills. Currency dollars are, after all, sovereign debt of zero duration and in any panic there is a rush to the short end of the curve, to the point of accepting some negative rates of return for the safety of capital.

But after that event, the decline of the dollar will gain again in momentum lower unless there is a profound systemic reform and restructuring of the federal budget deficits. Even clever frauds can work only so many times, and there is nothing particularly clever or sophisticated about Wall Street's latest antics, excepting of course their size and their audacity which the average mind cannot well grasp.

India Puts Its Weight Behind US Dollar Alternatives

Here is an alternative index of the US dollar from the Federal Reserve that is much broader than the DX in its constituent components. It is a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.

Broad currency index includes the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia.

It shows the same Eurodollar squeeze and subsequent decline. As a point of order, the term eurodollar is a bit misleading from its historical roots. It basically refers to any US dollars being held in other than domestic banks, and not just in Europe. The TWEXB is not the same timeframe as the DX because it is a more recent construct.