Global foreign currency reserves cross 8.1 trillion dollars

According to a recent Reuters report citing U.S Treasury Department sources, global foreign currency reserves swelled to $8.1 trillion by the end of 2009, more than covering the amount that was pulled out during the recent global economic throes. The figures were recently released as part of the long-awaited report by the Treasury to the Congress on exchange rate policies.

Despite China intervening heavily in the foreign exchange market from February to December 2009, to hold its yuan pegged to the Dollar, the Treasury Department once again declined to label Beijing a currency manipulator. Not surprising seeing how in the same period China boosted its holding of Dollars by $487.1 billion, more than six times the rise of any other country.

Before the worst phase of the financial crisis in 2008, global reserves had peaked at $7.2 trillion. Between July 2008 and February 2009, they declined by 5.8 percent, largely as a result of countries' efforts to stem currency depreciation.

Some countries also used a portion of their reserves to fund stimulus programs. Russia's reserves showed the biggest decline, dropping $120.1 billion over a seven-month period. Nearly all major reserve-holding economies resumed building stockpiles starting in February 2009.

"For a few countries, most notably China, the increase in reserves was associated with a decline in the nominal effective exchange rate, indicating that reserve accumulation may have been used to prevent exchange rate appreciation," the Treasury said.

There are no hard and fast rules for how much a country should hold in reserves. Commonly-used benchmarks include a sufficient amount to cover external debt coming due within 12 months, or enough to cover three to four months of imports.

Treasury said China's reserves alone would cover the short-term debt of the 12 largest reserve-holding emerging markets and still be above adequacy benchmarks.

Countries hold reserves for a variety of reasons, including for day-to-day transactions like debt repayment. Countries such as China with pegged exchange rates need to hold reserves to offset downward pressure on their currencies.

Some governments also hold reserves as a form of self-insurance against sudden loss of investment flows that could cause a financial crisis.

According to Treasury's figures, China's reserves as of December 2009 totaled $2.4 trillion, up 2.3 percent since February of that year. Japan's were $997 billion, up 0.2 percent since February. Russia and Saudi Arabia each held nearly $400 billion.