Effects of US Currency Depreciation on Sovereign Wealth Funds

As the US currency declines relative to the world’s currency many sovereign wealth funds are finding US companies rather inexpensive. Already many funds, such as the China Investment Corporation have taken significant stakes in US brand name financial institutions like Morgan Stanley, while other sovereign funds have invested in tech firms like Advance Micro Devices Inc (Mubadala). These seem like deals to the average sovereign investor who proclaims that their in it for the long run.

Since many central banks with large current account surpluses are now beginning to emulate portfolio managers, they are seeking to improve their asset allocation. Sovereign wealth funds are diversifying their portfolios into non-currencies to achieve higher returns rather than holding a depreciating US currency. According to the People’s Bank of China, they had around US$1.7 trillion in foreign reserves in December 2007. This gives the CIC a SWF to Foreign Exchange ratio of .12x (this leaves out SAFE and the Hong Kong Monetary Authority Investment Portfolio) which is low compared to the Abu Dhabi Investment Council’s ratio of 29.54. This ratio entails how large sovereign wealth funds are in size compared to foreign currency reserves.



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