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Who is Afraid of Asian FX Interventions? Large Lessons for Europe from a Three-asset-portfolio Model

Author

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  • Sebastian Dullien

    (FHTW Berlin, Germany)

Abstract

The paper develops a three-asset-portfolio model to analyse consequences of foreign exchange market operations by Asian central banks on the exchange rates between euro, dollar and an Asian currency. It is found that - contrary to public belief - the purchase of dollar assets by Asian central banks strengthens the dollar against both the euro and the Asian currency. A diversification of Asian central bank reserves from dollar into euro would weaken the dollar against both other currencies. Thus, such a diversification would be incompatible with Asian currency pegs. However, it is shown that Asian central banks could alter their relative portfolio composition while keeping the peg intact if they shifted from intervening against the dollar into intervening against the euro.

Suggested Citation

  • Sebastian Dullien, 2008. "Who is Afraid of Asian FX Interventions? Large Lessons for Europe from a Three-asset-portfolio Model," European Journal of Economics and Economic Policies: Intervention, Edward Elgar Publishing, vol. 5(2), pages 387-405.
    • Handle: RePEc:elg:ejeepi:v:5:y:2008:i:2:p:387-405
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    Cited by:

    1. Marc Lavoie & Jun Zhao, 2010. "A Study Of The Diversification Of China'S Foreign Reserves Within A Three‐Country Stock‐Flow Consistent Model," Metroeconomica, Wiley Blackwell, vol. 61(3), pages 558-592, July.

    More about this item

    Keywords

    foreign exchange interventions; exchange rates; revived Bretton-Woods-System;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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