Who is afraid of Asian FX interventions? Lessons from Europe from a threeasset-portfolio model”, Paper presented at the conference “Finance-led capitalism? Macroeconomic effects of changes in the financial sector

The paper develops a three-asset-portfolio model to analyse conse-quences 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 euro and the Asian cur-rency. A diversification of Asian central bank reserves from dollar into euro would weaken the dollar against both other currencies. Thus, such a di-versification would be incompatible with Asian currency pegs. However, it is shown that Asian central banks could alter their relative portfolio com-position while keeping the peg intact if they would shift from intervening against the dollar into intervening against the euro