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IMF urges countries to preserve vital foreign exchange reserves amid US dollar appreciation – Mintpaisa

The US dollar is at its highest level since 2000, having appreciated 22% against the yen, 13% against the euro and 6% against emerging market currencies since the beginning of this year. year

The US dollar is at its highest level since 2000, having appreciated 22% against the yen, 13% against the euro and 6% against emerging market currencies since the beginning of this year. year

The IMF has urged countries to preserve vital foreign exchange reserves to weather potentially worse outflows and turbulence in the future, amid an appreciating US dollar and depreciation of other major currencies, including the rupee. Indian.

In a blog post by the IMF’s first deputy managing director, Gita Gopinath, and the global lender’s chief economist, Pierre-Olivier Gourinchas, they said that in such a fragile environment, it is prudent to build resilience. Although central banks in emerging markets have accumulated dollar reserves in recent years, reflecting lessons learned from previous crises, these reserves are limited and should be used with caution.

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“Countries need to preserve vital foreign exchange reserves to weather potentially worse outflows and unrest in the future. Those who can should restore swap lines with central banks in advanced economies,” they said in a blog post.

Countries with sound economic policies that need to address moderate vulnerabilities should proactively avail themselves of International Monetary Fund precautionary lines to meet future liquidity needs.

Those with large foreign currency debts should reduce exchange rate mismatches using capital flow management or macroprudential policies, in addition to debt management operations to smooth repayment profiles, they wrote.

The dollar is notably at its highest level since 2000, having appreciated 22% against the yen, 13% against the euro and 6% against emerging market currencies since the beginning of this year.

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“Such a stronger dollar in a matter of months has significant macroeconomic implications for almost every country, given the dollar’s dominance in international trade and finance,” Ms. Gopinath and Mr. Gourinchas said in the blog post.

According to them, for many countries struggling with inflation, the weakening of their currency against the dollar has made the fight more difficult. On average, the estimated pass-through of a 10% dollar appreciation on inflation is 1%, they said.

IMF officials said several countries are resorting to foreign exchange interventions. Total foreign exchange reserves held by emerging markets and developing economies fell more than 6% in the first seven months of this year, they said.

Observing that the appropriate policy response to depreciation pressures requires focusing on the drivers of exchange rate change and signs of market disruptions, the IMF blog said that specifically, foreign exchange intervention should not not substitute for a justified adjustment of macroeconomic policies.

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“There is a role to play in temporarily intervening when currency movements significantly increase risks to financial stability and/or significantly disrupt the central bank’s ability to maintain price stability,” he said. declared.

Ms. Gopinath and Mr. Gourinchas pointed out that in some cases temporary foreign exchange intervention may be appropriate. It can also help prevent adverse financial amplification if a sharp depreciation increases financial stability risks, such as corporate defaults, due to mismatches, they wrote.

“Finally, temporary intervention can also support monetary policy in the rare circumstances where a sharp depreciation of the exchange rate could unanchor inflation expectations, and monetary policy alone cannot restore price stability,” they said. they stated.

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