Foreign exchange reserves (also called Forex reserves or FX reserves) in a strict sense are only the foreign currency In economics, the term currency can refer to a particular currency, for example Pound Sterling, or to the coins and banknotes of a particular currency, which comprise the physical aspects of a nation's money supply. The other part of a nation's money supply consists of money deposited in banks , ownership of which can be transferred by means of deposits and bonds held by central banks A central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend a government its currency. Like a normal commercial bank, a central bank charges interest on the loans made to borrowers, primarily the government of whichever country the bank exists for, and to other commercial banks, typically as and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold Gold is a chemical element with the symbol Au (from Latin: aurum, "shining dawn", hence adjective, aureate) and an atomic number of 79. It has been a highly sought-after precious metal for coinage, jewelry, and other arts since the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in veins and in alluvial, SDRs and IMF The International Monetary Fund is the intergovernmental organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rate and the balance of payments. It is an organization formed with a stated objective of stabilizing international exchange reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset. Simply stated, assets represent ownership of value that can be converted into cash . The balance sheet of a firm records the of the central bank A central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend a government its currency. Like a normal commercial bank, a central bank charges interest on the loans made to borrowers, primarily the government of whichever country the bank exists for, and to other commercial banks, typically as held in different reserve currencies A reserve currency, or anchor currency, is a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, such as oil, gold, etc, mostly the US dollar The United States dollar is the official currency of the United States. The U.S. dollar is normally abbreviated as the dollar sign, $, or as USD or US$ to distinguish it from other dollar-denominated currencies and from others that use the $ symbol. It is divided into 100 cents, and to a lesser extent the euro The euro is the official currency of the eurozone: 16 of the 27 Member States of the European Union (EU). It is also the currency used by the EU institutions. The eurozone consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Estonia is, the UK pound The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown dependencies (the Isle of Man and the Channel Islands) and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence (singular: penny), and the Japanese yen The yen (sign: ¥; code: JPY) is the currency of Japan. It is the third most-traded currency in the foreign exchange market after United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling. As is common when counting in East Asia, large quantities of yen are often counted, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves Bank reserves are banks' holdings of deposits in accounts with their central bank , plus currency that is physically held in bank vaults (vault cash). The central banks of some nations set minimum reserve requirements. Even when no requirements are set, banks commonly wish to hold some reserves, called desired reserves, against unexpected events deposited A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the bank, and represent the amount owed by the bank to with the central bank, by the government A government is the organization, or agency through which a political unit exercises its authority, controls and administers public policy, and directs and controls the actions of its members or subjects or financial institutions In financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are highly regulated by government.
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History
Official international reserves, the means of official international payments, formerly consisted only of gold Gold is a chemical element with the symbol Au (from Latin: aurum, "shining dawn", hence adjective, aureate) and an atomic number of 79. It has been a highly sought-after precious metal for coinage, jewelry, and other arts since the beginning of recorded history. The metal occurs as nuggets or grains in rocks, in veins and in alluvial, and occasionally silver. But under the Bretton Woods system The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states, the US dollar The United States dollar is the official currency of the United States. The U.S. dollar is normally abbreviated as the dollar sign, $, or as USD or US$ to distinguish it from other dollar-denominated currencies and from others that use the $ symbol. It is divided into 100 cents functioned as a reserve currency, so it too became part of a nation's official international reserve assets. From 1944-1968, the US dollar was convertible into gold through the Federal Reserve System, but after 1968 only central banks could convert dollars into gold from official gold reserves, and after 1973 no individual or institution could convert US dollars into gold from official gold reserves. Since 1973, no major currencies have been convertible into gold from official gold reserves. Individuals and institutions must now buy gold in private markets, just like other commodities. Even though US dollars and other currencies are no longer convertible into gold from official gold reserves, they still can function as official international reserves.
Purpose
In a flexible exchange rate system, official international reserve assets allow a central bank A central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend a government its currency. Like a normal commercial bank, a central bank charges interest on the loans made to borrowers, primarily the government of whichever country the bank exists for, and to other commercial banks, typically as to purchase the domestic currency In economics, the term currency can refer to a particular currency, for example Pound Sterling, or to the coins and banknotes of a particular currency, which comprise the physical aspects of a nation's money supply. The other part of a nation's money supply consists of money deposited in banks , ownership of which can be transferred by means of, which is considered a liability In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future for the central bank (since it prints the money or fiat currency The term derives from the Latin fiat, meaning "let it be done", as the money is established by government decree. Where fiat money is used as currency, the term fiat currency is used. Today, most national currencies are fiat currencies, including the US dollar, the euro, and all other reserve currencies, and have been since the Nixon as IOUs). This action can stabilize the value of the domestic currency.
Central banks throughout the world have sometimes cooperated in buying and selling official international reserves to attempt to influence exchange rates.
Changes in reserves
The quantity of foreign exchange reserves can change as a central bank implements monetary policy. A central bank that implements a fixed exchange rate policy may face a situation where supply and demand would tend to push the value of the currency lower or higher (an increase in demand for the currency would tend to push its value higher, and a decrease lower). In a flexible exchange rate regime, these operations occur automatically, with the central bank clearing any excess demand or supply by purchasing or selling the foreign currency. Mixed exchange rate regimes ('dirty floats', target bands or similar variations) may require the use of foreign exchange operations (sterilized or unsterilized[clarification needed]) to maintain the targeted exchange rate within the prescribed limits (China has been repeatedly accused of doing this by the USA).
Foreign exchange operations that are unsterilized will cause an expansion or contraction in the amount of domestic currency in circulation, and hence directly affect monetary policy and inflation: An exchange rate target cannot be independent of an inflation target. Countries that do not target a specific exchange rate are said to have a floating exchange rate In cases of extreme appreciation or depreciation, a central bank will normally intervene to stabilize the currency. Thus, the exchange rate regimes of floating currencies may more technically be known as a managed float. A central bank might, for instance, allow a currency price to float freely between an upper and lower bound, a price ", and allow the market to set the exchange rate; for countries with floating exchange rates, other instruments of monetary policy are generally preferred and they may limit the type and amount of foreign exchange interventions. Even those central banks that strictly limit foreign exchange interventions, however, often recognize that currency markets can be volatile and may intervene to counter disruptive short-term movements.
To maintain the same exchange rate if there is increased demand, the central bank can issue more of the domestic currency and purchase the foreign currency, which will increase the sum of foreign reserves. In this case, the currency's value is being held down; since (if there is no sterilization Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest. Monetary policy is usually used to attain a set of objectives oriented towards the growth and stability of the economy. These goals usually include stable prices and low unemployment. Monetary theory) the domestic money supply is increasing (money is being 'printed'), this may provoke domestic inflation (the value of the domestic currency falls relative to the value of goods and services).
Since the amount of foreign reserves available to defend a weak currency (a currency in low demand) is limited, a foreign exchange crisis or devaluation In common modern usage, it specifically implies an official lowering of the value of a country's currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, depreciation is used for the unofficial decrease in the exchange rate in a floating could be the end result. For a currency in very high and rising demand, foreign exchange reserves can theoretically be continuously accumulated, although eventually the increased domestic money supply will result in inflation and reduce the demand for the domestic currency (as its value relative to goods and services falls). In practice, some central banks, through open market operations aimed at preventing their currency from appreciating, can at the same time build substantial reserves.
In practice, few central banks or currency regimes operate on such a simplistic level, and numerous other factors (domestic demand, production and productivity, imports and exports, relative prices of goods and services, etc) will affect the eventual outcome. As certain impacts (such as inflation) can take many months or even years to become evident, changes in foreign reserves and currency values in the short term may be quite large as different markets react to imperfect data.
Costs, benefits, and criticisms
Large reserves of foreign currency allow a government to manipulate exchange rates - usually to stabilize the foreign exchange rates to provide a more favorable economic environment. In theory the manipulation of foreign currency exchange rates can provide the stability that a gold standard provides, but in practice this has not been the case. Also, the greater a country's foreign reserves, the better position it is in to defend itself from speculative attacks on the domestic currency.
There are costs in maintaining large currency reserves. Fluctuations in exchange markets result in gains and losses in the purchasing power of reserves. Even in the absence of a currency crisis, fluctuations can result in huge losses. For example, China holds huge U.S. dollar-denominated assets, but if the U.S. dollar weakens on the exchange markets, the decline results in a relative loss of wealth for China. In addition to fluctuations in exchange rates, the purchasing power of fiat money The term derives from the Latin fiat, meaning "let it be done", as the money is established by government decree. Where fiat money is used as currency, the term fiat currency is used. Today, most national currencies are fiat currencies, including the US dollar, the euro, and all other reserve currencies, and have been since the Nixon decreases constantly due to devaluation through inflation In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit. Therefore, a central bank must continually increase the amount of its reserves to maintain the same power to manipulate exchange rates. Reserves of foreign currency provide a small return in interest. However, this may be less than the reduction in purchasing power of that currency over the same period of time due to inflation In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit, effectively resulting in a negative return known as the "quasi-fiscal cost". In addition, large currency reserves could have been invested in higher yielding assets.
Excess reserves
Foreign exchange reserves are important indicators of ability to repay foreign debt and for currency defense, and are used to determine credit ratings of nations, however, other government funds that are counted as liquid assets that can be applied to liabilities in times of crisis include stabilization funds, otherwise known as sovereign wealth funds A sovereign wealth fund is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. Sovereign wealth funds invest globally. Some of them have grabbed attention making bad investments in several Wall Street financial firms including Citigroup, Morgan Stanley, and. If those were included, Norway After World War II, Norway experienced rapid economic growth, with the first two decades due to the Norwegian shipping and merchant marine and domestic industrialization, and from the early 1970s, a result of exploiting large oil and natural gas deposits that had been discovered in the North Sea and the Norwegian Sea. Today, Norway ranks as the and Persian Gulf States The labels "Arab states of the Persian Gulf" or "Persian Gulf states" or "Persian Gulf Arab states" , are usually reserved for the six Arab monarchical states joined since 1981 in the Cooperation Council for the Arab States of the Gulf, or Gulf Cooperation Council : Bahrain, Saudi Arabia, the sultanate of Oman, Kuwait, would rank higher on these lists, and UAE Before 1971, the UAE was known as the Trucial States or Trucial Oman, in reference to a 19th century truce between the United Kingdom and several Arab Sheikhs. The name Pirate Coast was also used in reference to the area's emirates from the 18th to the early 20th century's $1.3 trillion Abu Dhabi Investment Authority The Abu Dhabi Investment Authority is a sovereign wealth fund owned by Abu Dhabi, United Arab Emirates. ADIA has never published how much it has in assets. As a result of this, there is some debate on how much the fund has under control. Accepted estimates have been between $650 billion to approximately $875 billion in assets. The Sovereign Wealth would be second after China China is seen variously as an ancient civilization extending over a large area in East Asia, a nation and/or a multinational entity. Singapore also has significant government funds including Temasek Holdings Temasek Holdings is an investment company owned by the government of Singapore. With an international staff of 380 people, it manages a portfolio of about S$186 billion , focused primarily in Asia. It is an active shareholder and investor in - financial services, telecommunications & media, technology, transportation, industrials, lifesciences, and GIC The Government of Singapore Investment Corporation Private Limited is a sovereign wealth fund established by the Government of Singapore in 1981 to manage Singapore's foreign reserves. With a network of eight offices in key financial capitals around the world, GIC invests internationally in equities, fixed income, money-market instruments, real. India Home to the ancient Indus Valley Civilisation and a region of historic trade routes and vast empires, the Indian subcontinent was identified with its commercial and cultural wealth for much of its long history. Four major religions, Hinduism, Buddhism, Jainism and Sikhism originated here, while Zoroastrianism, Judaism, Christianity and Islam is also planning to create its own investment firm from its foreign exchange reserves.
Reserves of foreign exchange and gold Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or safe haven against any economic, political, social or currency-based crises. These crises include investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest. Investors also buy gold early in 2006 See also: List of countries by foreign exchange reserves Foreign exchange reserves in a strict sense are only the foreign exchange reserves into sovereign wealth funds, which can rival foreign exchange reserves in sizeThe following is a list of the ten largest countries by foreign exchange reserves:
- Notes
- ^ China updates its information quarterly.
- ^ a b Russia and India update their information weekly and monthly.
- ^ Brazil updates its information daily.
These few holders account for more than 60% of total world foreign currency reserves. The adequacy of the foreign exchange reserves is more often expressed not as an absolute level, but as a percentage of short-term foreign debt, money supply, or average monthly imports.
See also
- Balance of payments
- Endaka
- Global assets under management
- List of countries by foreign exchange reserves
- Official gold reserves
- Reserve currency
- Sovereign wealth funds
- Special Drawing Rights
- Foreign exchange reserves of the People's Republic of China
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Thu, 09 Sep 2010 19:19:57 GMT+00:00
Pakistan Daily Mail Secondly, global devaluation will shrink China's foreign exchange assets. As the world's largest foreign reserves country, China will lose the most if the ...
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China s Foreign Reserve tops the world s central banks by a far margin According to the latest stats in 2009 China holds a total of 2273 Billion USD of foreign reserve which is more than
trilamisu
Wed, 18 Aug 2010 09:43:59 GM
These denominations of pop and, or into another . foreign. Exchange . reserves. . Would not be inflationary, and so on, and how much is worth how much! this is just like the United States fell ill, and then a little pin yourself, ...
Q. And what is their policy to deal with that reserve in the near future?
Asked by binocular222 - Thu Jun 12 12:21:24 2008 - - 4 Answers - 0 Comments
A. Any time you hold a resource it is an advantage. The disadvantage of the resource is that the world uses dollars as its primary reserve currency. Releasing that many dollars into the world will cause world wide inflation. Still it is a devaluing resource so it makes no sense to hold it. China holds a $1 trillion claim on US production, that is an enormous deferred savings on their part. Roughly speaking, China has a right to about 7% of all US production, if they took it all at once. Since it would deflate the value of the dollar, it is actually a smaller claim, maybe 5%. The policy in the near future is being worked out. China wants to minimize loss of value due to inflation and minimize economic distortions to their own economy… [cont.]
Answered by OPM - Thu Jun 12 12:43:01 2008
