Custody Holdings and The Dollar

As is well appreciated, the Federal Reserve competes with private sector banks in providing custody services to foreign central banks. The data is reported on a weekly basis, every Thursday. Yesterday the Fed reported that custody holdings rose by about $5 bln. That brings the Q4 increase to about $93.5 bln and the year-to-date figure to $432 bln. In 2008, custody holdings at the Federal Reserve rose by about $460 bln. There still is a couple weeks worth of custody holdings data to complete the year, but the broadly speaking, 2009 growth has been in line with the 2008 increase. Custody holdings consist of both agency debt and Treasuries. Agency debt is gradually being divested, while Treasury holdings continue to grow. The increase in Treasury holdings are roughly on par with last year's so what appears to be minor change in the pace of overall custody holdings is more a function of the agency sales. The Treasury's TIC data tracks flows going through US banking system. So if say a foreign central bank bought Treasuries through a foreign bank it would not show up in the TIC data.

However, if that foreign central bank then had those bonds transferred to the its Fed account, then it would show up in the custody holdings report. Last year, the increase in custody holdings financed a full 60% of the US $756 bln current account deficit. Due to the dramatic fall in the US current account deficit this year, the custody holding increase appears to have full financed or perhaps even slightly over financed the current account deficit, which in the first three quarters totalled $310 bln. This is would allow the Q4 current account deficit to be the widest of the year, but not larger than about $120 bln. The largest of the year thus far, we learned this week, was the $108 bln shortfall in Q3.