Purpose Of Foreign Exchange Reserves

Foreign exchange reserves usually stores foreign currency and bonds held by the central banks of nations all over the world. The basic purpose of foreign exchange reserve is for foreign settlement of debts and payments between governments. Exchange reserves now associates with international currency and bonds, particularly U.S. dollars and Treasuries. However, in a flexible exchange rate system, foreign exchange reserves assets enables a central bank to purchase the local currency which is considered a liability for central bank. This action mainly stabilizes the value of the domestic currency. This is the primary purpose of foreign exchange reserves. However, foreign exchange reserve policy affects exchange rates, international trade and inflation.

In simple terms, official international reserves are mainly used for international payments between countries. These payments primarily associates with loans to create infrastructure, military spending and government aids. This remains another main purpose of foreign exchange reserves. Most of the countries remain Countries remain consigned to building concrete international reserves so as stay in good standing with allies and to help balance the world economy. Central banks have always used international reserves to influence exchange rates and, consequently, international trade and inflation. Central banks trade local currency against foreign currency collectively to affect exchange rate movements.

Central banks of the world trade or run printing press to make domestic currency which is used for buying foreign exchange. Purchasing international currency by creating money devalues the domestic currency against that particular medium. Conversely, international central banks strengthen the domestic currency by releasing foreign currency back into the marketplace out of the reserves in exchange for the domestic currency, which is then taken out of circulation. However, exchange rates affect foreign trade by influencing the prices of goods relative to each other by nationality. Central banks manipulate foreign exchange reserves for competitive advantages. Foreign exchange reserves sometimes affect inflation and loss. Central banks pressure the value of domestic currency through printing and creating money in order to buy foreign exchange. Moreover, the nations that hold big amounts of foreign currency incur losses in buying power as the exchange values of that currency decrease.