Deflation, the Dollar and Reserves

A week ago it was emerging market forex reserves declining (More Signs the Peak Is In, now it's the world:

Once Over $12 Trillion, the World’s Currency Reserves Are Now Shrinking

Global reserves declined to $11.6 trillion in March from a record $12.03 trillion in August 2014, halting a five-fold increase that began in 2004, according to data compiled by Bloomberg. While the drop may be overstated because the strengthening dollar reduced the value of other reserve currencies such as the euro, it still underlines a shift after central banks -- with most of them located in developing nations like China and Russia -- added an average $824 billion to reserves each year over the past decade.

As I pointed out in Dollar Bull Is Deflation, the dollar bull is being driven by deflation in the U.S. dollar credit market. There's no over- or understated drop in forex reserves because the exchange rate and the credit deflation are linked. Growing forex reserves and a weaker U.S. dollar were both the result of global monetary policy and the credit cycle. The credit boom led to rising forex reserves in a world flooded with liquidity. As soon as the liquidity stoped rising, the bust set in. The dollar soared, the value of non-dollar assets, including non-dollar forex reserves, collapsed.

Momentum has shifted and the down cycle in forex reserves has begun.