What is Foreign Official Dollar Reserves?
Foreign official dollar reserves -FRODOR is a term and acronym coined by economist Ed Yardeni for an economic indicator that relates international liquidity to the U.S. dollar holdings in foreign central banks. It is measured as the sum of U.S. Treasury and U.S. agency securities held by foreign banks.
Understanding the Foreign Official Dollar Reserves (FRODOR)
Foreign official dollar reserves -FRODOR serve a purpose for those closely monitoring the economy because the purchase of U.S. Treasury bonds and agency securities by foreign central banks is linked to the price of commodities, global oil demand, inflationary pressures, exchange rates and even the price of stocks. These relationships exist because the U.S. dollar has been the global monetary standard since 1971 when President Richard Nixon took America off the gold standard. The precipitous rise in the American trade deficit spurred Nixon's action. At one point, foreign countries held three times more dollars than the U.S. Treasury. Nixon worried that America did not have enough gold reserves to redeem all the foreign-held dollars. The end of the postwar gold standard, combined with the fact that the U.S. had never defaulted on its bonds, effectively made the U.S. dollar the new global monetary standard.
This monetary change benefited the United States since the dollar then became the reserve currency of most nations. Countries that exported more to the U.S. than they imported from the U.S., such as China, needed to replenish the reserves flowing out of their central banks. Instead of buying gold bullion, now they simply bought U.S. bonds.
FRODOR Can Indicate Economic Cycles
Over the years of the unofficial dollar standard, the relationships between foreign official dollar reserves and the global economy have become generally predictable. For example, during recessions the U.S. Treasury tends to issue more money to stimulate the economy. This eventually leads to a higher trade deficit as the expanding economy spurs American consumers buy more imported products. That causes the value of the dollar to fall on currency exchanges, since U.S. importers are effectively “buying” foreign currency to finance their wholesale purchases.
As the dollar weakens, foreign central bankers often try to prop up the dollar relative to their local currency, by buying more dollars; that keeps the price of imports lower in America, which boosts the fortunes of exporters in the foreign country. Conversely, a declining FRODOR indicates foreign central banks are buying less dollars because their exports have slowed and the dollar is strengthening.
Generally, a rising FRODOR indicates a falling dollar exchange value, and a declining FRODOR indicates a stronger dollar. Meanwhile, when FRODOR rises so do the prices of stocks, commodities and real estate, all of which are affected by global monetary liquidity. In addition, the bond yield curve also tends to rise with rising FRODOR, due in part to inflationary pressures.