Foreign bank deposits at the Federal Reserve have more thandoubled to $715 billion from $350 billion since the end of 2010amid Europe's debt turmoil, buttressing the dollar's status as theworld's reserve currency.

Forty-seven non-U.S. banks held balances of more than $1 billionat the New York Fed as of Sept. 30, up from 22 at the end of 2010,according to a survey of 80 financial institutions by ICAP Plc, theworld's largest inter-dealer broker. The dollar has appreciated 7.2percent since Standard & Poor's cut the nation's AAA creditrating Aug. 5, the second-best performance after the yen amongdeveloped-nation peers, according to Bloomberg Correlation-WeightedCurrency Indexes.

A budget deficit of more than $1 trillion, a deadlock amongCongressional supercommittee members on spending cuts and 9 percentunemployment haven't deterred investors from seeking safety in theworld's biggest economy. The euro has been undermined by theregion's sovereign debt crisis, while the Swiss franc and yen havefallen as their governments buy billions of dollars to weakenthem.

“There's not anything close to a substitute and part of it isthe deepness of the market, the liquidity,” Jack McIntyre, a fundmanager who oversees $23 billion in debt at Brandywine GlobalInvestment Management, a unit of Legg Mason Inc., said Nov. 15 in atelephone interview from Philadelphia. “There's a perception, rightor wrong, that we're going to make good on all of our assets.”

The Fed's record-low target interest rate for overnight loansamong banks at between zero and 0.25 percent hasn't discourageddollar buying as slowing global growth and turmoil in Europe spurcentral banks from Australia to Brazil to cut rates, reducing theirappeal to investors seeking higher returns.

Foreign demand for U.S. assets rose the most in 10 months inSeptember. Net buying of long-term equities, notes and bondstotaled $68.6 billion, the highest since November 2010, comparedwith net buying of $58 billion in August, the Treasury Departmentsaid Nov. 16.

The dollar is up 6.5 percent in the past three months,recovering to about level this year with its nine peers, whichinclude the Swedish krona and the Swiss franc. It's trading about 4percent below where it was in 1975, two years after PresidentRichard Nixon ended the currency's official ties to gold.

The U.S. currency rose 1.7 percent to $1.3525 per euro in thefive days ended Nov. 18, gaining for a third week in a row. It fell0.4 percent to 76.91 yen. The greenback traded at $1.3447 per euroand 76.90 yen as of 10:52 a.m. London time.

Demand for Treasury securities that mature in under a year hasincreased as financial institutions boost holdings of thehighest-quality assets to meet new regulations set by the Bank forInternational Settlements in Basel, Switzerland. Bank holdings ofTreasuries and government-related debt totaled a record $1.69trillion at the end of October, up from less than $1.1 trillion in2008.

“With the heightened emphasis on stronger liquidity positionsfor financial institutions around the world, we've seen an increasein the regulatory demand for liquid assets, but we're notnecessarily seeing an increase in the supply of liquid assets,” LouCrandall, chief economist at Wrightson ICAP LLC in Jersey City, NewJersey, a unit of ICAP, said in a Nov. 14 interview. “They'remeeting that need by holding Fed balances.”

Rates on three-month bills ended last week at zero, down fromthis year's high of 0.157 percent in February and 5 percent inmid-2007, just before credit markets froze as losses on subprimemortgages accelerated.

“People are hoarding cash because they see that there's somedifficulty in the U.S. dollar funding market” as banks shedeuro-denominated assets, Charles St-Arnaud, a foreign- exchangestrategist at Nomura Holdings Inc. in New York, said in a telephoneinterview Nov. 14.

Three-month cross-currency basis swaps, the rates banks pay toconvert euro payments into dollars, were as low as 132 basispoints, or 1.32 percentage point, below the euro interbank offeredrate Nov. 18, the most expensive since December 2008.

The cost of dollar funding is increasing as Europe's debt crisisescalates. Last week, yields on German two-year bunds dropped below0.3 percent for the first time, while the extra yield investorsdemand to hold 10-year bonds from France, Belgium, Spain andAustria instead of bunds climbed to euro-era records. The spreadbetween German and French bonds of that maturity widened to 190basis points on Nov. 15, the highest in the euro union'shistory.

European Central Bank policy makers cut the benchmark interestrate by 0.25 percent at their Nov. 3 meeting, after increasing itby 50 basis points earlier this year. Expectations for further cutsrose after Europe's third quarter gross domestic product expanded0.2 percent from the previous three months, a Nov. 15 reportshowed, signaling the region may be headed for a recession.

Slowing growth drove the Reserve Bank of Australia to cut itsinterest rate this month for the first time since April 2009,reducing it to 4.5 percent. Brazil's central bank has lowered itsrate twice since July to 11.5 percent, after raising it to 12.5percent during the past 1 1/2 years.

Cuts in central bank rates around the world have made the carrytrade of selling dollars to buy the currencies of higher- yieldingcountries unprofitable. The trade, when borrowing dollars to buythe Australian, Swedish, Brazilian and South African currencies,has lost 30 percent since July, according to Bloomberg data.

The Fed said it will keep its rate at an all-time low throughmid-2013 as the unemployment rate has remained stuck at or above 9percent since March.

Consumer confidence rose to 64.2 this month, the highest sinceJune, according to the Thomson Reuters/University of Michiganpreliminary index of sentiment. Retail sales rose 0.5 percent inOctober, increasing for the fifth-straight month, according to agovernment report.

The economy expanded at a 2.5 percent pace in the third quarter,from 1.3 percent in second quarter, the Commerce Department saidOct. 27. Economists have increased their fourth- quarter economicforecasts to an expansion of 2.3 percent, from 2 percent estimatedin October, according to two Bloomberg News surveys.

Faster growth may boost investor appetite for riskier assets,decreasing demand for the dollar's safety, said Lane Newman,director of foreign exchange at ING Groep NV in New York. “This isperhaps a temporary respite from the dollar losing its reservestatus,” he said. “I see this as a decades- long trend. Ultimately,it's the devaluation and the end of the hegemony of the bigdollar.”

The dollar has been the world's reserve currency since World WarII, when the U.S. and allies agreed at the 1944 Bretton Woodsconference to peg it to a rate of $35 per ounce of gold. Afterglobal currencies began freely floating in 1973, it has remainedthe most-traded legal tender, accounting for 85 percent of the $4trillion per day foreign exchange market, according to the BIS.

Its share of foreign-exchange holdings has held steady at 61.6percent since 2009 after peaking at 72.7 percent in 2001. The eurohas stabilized at an average of 26.6 percent of reserves since2007, up from 18 percent at its inception in 1999.

Options traders are increasingly betting that the dollar willstrengthen. They paid 4.4 percentage points more for the right tosell the euro against the dollar than to buy it on Nov. 17, themost since the common currency's inception in 1999. The so-calledthree-month 25-delta risk reversal rate has widened for alldeveloped-nation currencies versus the dollar and foremerging-markets such as the real and Mexican peso.

The dollar's rise comes as a Congressional panel of sixDemocrats and six Republicans, known as the supercommittee, hasuntil Nov. 23 to find $1.2 trillion in deficit reduction, or causethat much in spending cuts to go into effect beginning in 2013.

The bipartisan group is expected to announce that it has failedto reach agreement on federal budget savings, a Democratic aidesaid. The aide, who wasn't authorized to discuss internal matterspublicly and requested anonymity, said in an e- mail yesterday thatit was highly unlikely that the talks could be salvaged.

If Congress removes the automatic deficit cuts, Standard andPoor's may drop the nation's credit rating to AA, after reducing itto AA+ following the debt-cutting agreement, the ratings companysaid in a statement Aug. 5 when it announced the downgrade.

The U.S. budget deficit was $1.3 trillion in the fiscal yearended Sept. 30, up from $1.29 trillion in 2010 and thesecond-highest on record, according to Treasury Department data. Itreached $1.42 trillion in 2009, the most ever.

Other traditional havens in times of market stress, the Swissfranc and yen, reached record highs against the euro and dollar,respectively, this year before their central banks acted inSeptember and October to drive them from their peaks.

“The U.S. picks up an awful lot of the slack,” Alan Ruskin,global head of Group-of-10 foreign-exchange strategy at DeutscheBank AG, the world's biggest currency trader according to EuromoneyInstitutional Investor Plc, said in a Nov. 17 telephone interview.“Particularly for large reserve portfolios, that need very liquidmarkets, they're only really going to be accommodated in the U.S.market.”

Bloomberg