foreign exchange reserves

Foreign exchange reserves are the foreign currency deposits held by national banks of different nations. These are assets of Governments which are held in different hard currencies such as Dollar, Euro, Yen and Pound Sterling.

Uses

Central banks accumulate foreign reserves as a way to affect the exchange rates. By printing local currency and then exchanging it for a foreign currency, central banks increase the supply of the home currency on the foreign exchange markets. This puts a pressure on the home currency to depreciate, and conversely makes foreign currencies appreciate relative to the home currency. Currency depreciation is used by government to make local exporters more competitive at the expense of making imports and capital purchases more expensive. When a country accumulates a large amount of reserves relative to the amount of local currency outstanding, it may establish an exchange rate peg. One example of such a peg is the Chinese peg of the Yuan (also known as the Remnimbi) to the US Dollar. If the level of reserves later falls or inflation picks up, investors may start to question the 'sustainability' of a peg, and put speculative pressure on the currency. When the country is no longer able to sustain the pressure, the peg collapses and a currency crisis ensues. When investors started questioning Argentinian government's ability to pay off its debt in 2001, the peso's peg to the dollar collapsed and resulted in a depression in the local economy.

Levels

The countries with the largest foreign reserves are Japan, the People's Republic of China (mainland only, excluding Hong Kong and Macao) ($514.5 billion at the end of September 2004), the Republic of China (Taiwan), Hong Kong, the Republic of Korea, India ($140.43 billion as of March 2005) and the Holy See.