Foreign Official Dollar Reserves (FRODOR)

What Is Foreign Official Dollar Reserves?

Foreign official dollar reserves (FRODOR) is a term and abbreviation begat by economist Ed Yardeni for an economic indicator that relates international liquidity to the U.S. dollar holdings in foreign central banks. It is estimated 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) fill a need for those closely monitoring the economy on the grounds that 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 tensions, exchange rates and, surprisingly, the price of stocks. These connections exist in light of the fact that the U.S. dollar has been the global monetary standard beginning around 1971 when President Richard Nixon took America off the gold standard. The abrupt rise in the American trade deficit prodded Nixon's action. At a certain point, foreign countries held three times a bigger number of dollars than the U.S. Treasury. Nixon stressed that America needed more gold reserves to reclaim every one of the foreign-held dollars. The finish of the post bellum gold standard, combined with the way that the U.S. had never defaulted on its bonds, effectively made the U.S. dollar the new global monetary standard.

This monetary change helped the United States since the dollar then turned into the reserve currency of most nations. Countries that traded more to the U.S. than they imported from the U.S., like China, expected to recharge the reserves flowing out of their central banks. Rather than buying gold bullion, presently they essentially bought U.S. bonds.

FRODOR Can Indicate Economic Cycles

Over the course of the long periods of the unofficial dollar standard, the connections between foreign official dollar reserves and the global economy have become generally unsurprising. For instance, during downturns the U.S. Treasury will in general issue more money to animate the economy. This eventually prompts a higher trade deficit as the growing economy spurs American consumers buy more imported products. That makes the value of the dollar fall on currency exchanges, since U.S. shippers are effectively "buying" foreign currency to finance their wholesale purchases.

As the dollar debilitates, foreign central bankers frequently try to prop up the dollar relative to their nearby currency, by buying more dollars; that keeps the price of imports lower in America, which supports the fortunes of exporters in the foreign country. On the other hand, a declining FRODOR shows foreign central banks are buying less dollars in light of the fact that their exports have eased back and the dollar is fortifying.

Generally, a rising FRODOR demonstrates a falling dollar exchange value, and a declining FRODOR shows a more grounded dollar. In the mean time, when FRODOR rises, so do the prices of stocks, commodities, and real estate, which are all impacted by global monetary liquidity. What's more, the bond yield curve likewise will in general rise with rising FRODOR, due in part to inflationary tensions.