Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
And since the domestic sector does not wish to hold foreign currency, it will engage in an FX transaction with the domestic CB
It makes much more sense that the foreign (hegemonic) sector does not wish to hold domestic currency. If is a fact that the domestic sector does want to hod dollars. Brazilian banks offer dollar deposit and there is even a specific interest rate (cupom cambial) in Brazil for that purpose. In fact, the dollar leg of the government's currency swaps not only has its notional denominated in dollars but the coupons are indexed to the cupom cambial.
FT.com: Brazil: net debtor to the world
When the bank uses such a swap to limit the depreciation of the real, it offers to pay the difference between the initial exchange rate and the final exchange rate during the period of the contract, plus a dollar-linked rate of interest (known to traders as the cupom cambial). In return, it receives the cumulative interbank interest rate (currently about 10 per cent a year) on the amount of the contract in Brazilian reals. Crucially, the contracts are settled entirely in reals. No dollars exchange hands and there is no obvious impact on the country's ability to pay its foreign debts.
(already quoted elsewhere in this thread, but okay...)
You use 6 columns:
Domestic nongov't domestic currency account
Domestic nongov't foreign currency account
Gov't domestic currency account
Gov't foreign currency account
Foreign domestic currency account
Foreign foreign currency account
Well, that's equivalent to using three columns and keeping the dollar and real assets separate, which is what I do in my balance sheet.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Carrie (migeru at eurotrib dot com) on Sat Jan 18th, 2014 at 01:11:23 PM EST
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