Foreign exchange reserves

foreign exchangeforeign-exchange reservesforeign reservesforeign exchange reserveforeign currency reservescurrency reservesforeign reserveinternational reservescurrency reserveforex reserves
Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets.wikipedia
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Reserve currency

reserve currenciesforeign currency reservesanchor currency
Reserves are held in one or more reserve currencies, nowadays mostly the United States dollar and to a lesser extent the euro.
A reserve currency (or anchor currency) is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves.

Balance of payments

balance of paymentbalance-of-paymentsaccount balance
Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets.
A BoP surplus (or deficit) is accompanied by an accumulation (or decumulation) of foreign exchange reserves by the central bank.

Special drawing rights

SDRSDRsspecial drawing right
Some countries hold a part of their reserves in gold, and special drawing rights are also considered reserve assets.
Special drawing rights (abbreviated SDR, ISO 4217 currency code XDR (numeric: 960) ) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF).

Currency crisis

balance of payments crisiscurrency crisescurrency
Since the amount of foreign reserves available to defend a weak currency (a currency in low demand) is limited, a currency crisis or devaluation could be the end result.
A currency crisis is a situation in which serious doubt exists as to whether a country's central bank has sufficient foreign exchange reserves to maintain the country's fixed exchange rate.

Fixed exchange rate system

fixed exchange ratepeggedfixed
Hence, in a world of perfect capital mobility, a country with fixed exchange rate would not be able to execute an independent monetary policy.
Countries use foreign exchange reserves to intervene in foreign exchange markets to balance short-run fluctuations in exchange rates.

Floating exchange rate

floatfloatedfloating
In a pure flexible exchange rate regime or floating exchange rate regime, the central bank does not intervene in the exchange rate dynamics; hence the exchange rate is determined by the market.
The US dollar runs a close second, with very little change in its foreign reserves.

Mercantilism

mercantilistmercantilemercantilists
Usually, the explanation is based on a sophisticated variation of mercantilism, such as to protect the take-off in the tradable sector of an economy, by avoiding the real exchange rate appreciation that would naturally arise from this process.
Mercantilism includes a national economic policy aimed at accumulating monetary reserves through a positive balance of trade, especially of finished goods.

Guidotti–Greenspan rule

Moreover, holding reserves, as a consequence of the increasing of financial flows, is known as Guidotti–Greenspan rule that states a country should hold liquid reserves equal to their foreign liabilities coming due within a year.
The Guidotti–Greenspan rule states that a country's reserves should equal short-term external debt (one-year or less maturity), implying a ratio of reserves-to-short term debt of 1.

Devaluation

devalueddevaluecurrency devaluation
Since the amount of foreign reserves available to defend a weak currency (a currency in low demand) is limited, a currency crisis or devaluation could be the end result.
In an open market, the perception that a devaluation is imminent may lead speculators to sell the currency in exchange for the country's foreign reserves, increasing pressure on the issuing country to make an actual devaluation.

Exchange rate

exchange ratesreal exchange rateforeign exchange rate
Thus, the quantity of foreign exchange reserves can change as a central bank implements monetary policy, but this dynamic should be analyzed generally in the context of the level of capital mobility, the exchange rate regime and other factors.
A nation with a trade deficit will experience a reduction in its foreign exchange reserves, which ultimately lowers (depreciates) the value of its currency.

Sovereign wealth fund

sovereign wealth fundsNational Wealth FundSovereign fund
Sovereign wealth funds are examples of governments that try to save the windfall of booming exports as long-term assets to be used when the source of the windfall is extinguished.
Most SWFs are funded by revenues from commodity exports or from foreign-exchange reserves held by the central bank.

Speculative attack

speculative attacksspeculationunprincipled gambling
As a consequence, even those central banks that strictly limit foreign exchange interventions often recognize that currency markets can be volatile and may intervene to counter disruptive short-term movements (that may include speculative attacks).
In order to maintain a fixed exchange rate, the nation's central bank stands ready to buy back its own currency at the fixed exchange rate, paying with its holdings of foreign exchange reserves.

Sterilization (economics)

sterilizationsterilizedsterilising
Foreign exchange operations can be sterilized (have their effect on the money supply negated via other financial transactions) or unsterilized.
It can do this by using some of its foreign exchange reserves to buy local currency.

Swiss National Bank

Schweizerische NationalbankCentral BankNational Bank
A case to point out is that of the Swiss National Bank, the central bank of Switzerland.
The National Bank manages currency reserves.

Hard currency

sound moneyhard currencieshard money
The Swiss franc is regarded as a safe haven currency, so it usually appreciates during market's stress.
One barometer of hard currencies is how they are favored within the foreign-exchange reserves of countries:

1997 Asian financial crisis

Asian financial crisisAsian economic crisisEast Asian financial crisis
Historically, especially before the 1997 Asian financial crisis, central banks had rather meager reserves (by today's standards) and were therefore subject to the whims of the market, of which there was accusations of hot money manipulation, however Japan was the exception.
To prevent currency values collapsing, these countries' governments raised domestic interest rates to exceedingly high levels (to help diminish flight of capital by making lending more attractive to investors) and intervened in the exchange market, buying up any excess domestic currency at the fixed exchange rate with foreign reserves.

Bretton Woods system

Bretton WoodsBretton Woods AgreementBretton Woods Institutions
After the end of the Bretton Woods system in the early 1970s, many countries adopted flexible exchange rates.

GIC Private Limited

Government of Singapore Investment CorporationGICGIC Real Estate
Apart from high foreign exchange reserves, Singapore also has significant government and sovereign wealth funds including Temasek Holdings (last valued at US$177 billion) and GIC Private Limited (last valued at US$320 billion).
GIC Private Limited, formerly known as Government of Singapore Investment Corporation, is a sovereign wealth fund established by the Government of Singapore in 1981 to manage Singapore's foreign reserves.

Hot money

Historically, especially before the 1997 Asian financial crisis, central banks had rather meager reserves (by today's standards) and were therefore subject to the whims of the market, of which there was accusations of hot money manipulation, however Japan was the exception.
One common way of approximating the flow of “hot money” is to subtract a nation’s trade surplus (or deficit) and its net flow of foreign direct investment (FDI) from the change in the nation’s foreign reserves.

Bank of France

Banque de FranceBanque RoyaleBanque Générale
For example, in the Baring crisis (the "Panic of 1890"), the Bank of England borrowed GBP 2 million from the Banque de France.
The Bank of France establishes France's balance of payments and manages part of the foreign exchange reserves of the ECB.

Endaka

endaka fukyōrapid appreciation of the yenrising of the yen against the dollar
Another was state intervention BOJ in foreign exchange reserves, which it ultimately gave up in 2004 after accumulating nearly a trillion dollars.

Foreign-exchange reserves of China

Foreign exchange reserves of the People's Republic of ChinaForeign exchange reserve of the People's Republic of ChinaForeign exchange reserves of China

Central bank

central bankscentral bankingcentral banking system
Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets.

Monetary authority

monetary authoritiesissue currencymonetary
Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence the foreign exchange rate of its currency, and to maintain confidence in financial markets.