One of the obligations that we took on as supplier of the reserve currency is to accommodate other central banks need for dollar liquidity. This may take the form of short term loans to other Central Banks. The U.S. Central bank, to my knowledge, virtually never loans without collateral. The exception may be overnight, or very short term loans to the U.S. Treasury. Most loans to the governments of other countries are made via the IMF and World Bank. Much of what our Congress "gives" in foreign aid has strings attached, perhaps unspoken. For example, the money Congress "gives" to Israel every year comes back to us as an indirect U.S. taxpayer subsidy of the U.S. defense industry.
Although most U.S. Treasury bonds are held by U.S. interests, there is a large demand for Treasuries created as a result of the Dollar being the reserve currency. Other central banks of course to not want to have huge dollar deposits in their reserve accounts at the Fed. They want to convert their excess reserves to Treasuries to the extent they can, as Treasuries are an interest paying store of dollars. A country like China that runs a large trade surplus with the U.S. will create a fairly substantial demand for Treasuries. As the trade balance between our two countries shifts one way or the other you will see China adjusting their Treasury holdings accordingly. They will do the same with the Euro, but they are inconvenienced with the lack of a Euro Bond which Germany has consistently opposed. This is what's keeping the European Monetary Union from becoming complete. It is, in my opinion, a major weakness of the EU monetary union. And it's a reason China may seek to limit its Euro reserves at the ECB.
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