Foreign exchange reserves

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Foreign exchange reserves are the foreign currency deposits held by central banks and monetary authorities. These are assets of the central banks which are held in different reserve currencies such as the dollar, euro and yen, and which are used to back its liabilities eg the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions.

1 History
2 Purpose
3 Levels
4 See also
5 External links

[edit] History

Reserves were formerly held only in gold, as official gold reserves. But under the Bretton Woods system, the United States pegged the dollar to gold, and allowed convertibility of dollars to gold. This effectively made dollars appear as good as gold. The US government eventually abandoned the gold peg, making the dollar a reserve currency by fiat only.

[edit] Purpose

In a non fixed exchange rate system, reserves allow a central bank to purchase the issued currency, exchanging its assets to reduce its liability. The purpose of reserves is to allow central banks an additional means to stabilise the issued currency from excessive volatility, and protect the monetary system from shock, such as from currency traders engaged in flipping. High reserves is often seen as a strength, as it indicates the backing a currency has. Low or falling reserves, may be indicative of an imminent bank run on the currency or default, such as in a currency crisis.

[edit] Levels

Image:Reserves of foreign exchange and gold.PNG At the end of 2004, 66% of the identified official foreign exchange reserves in the world were held in United States dollars and 25% in euros [1].

Monetary Authorities with the largest foreign reserves in 2006
Central Bank/Monetary Authority	billion USD (end of month)
Image:Flag of the People's Republic of China.svg People's Republic of China	$1010 (October)
Image:Flag of Japan (bordered).svg Japan	$886 (October)
Image:Flag of Russia (bordered).svg Russia	$283 (November 24¹)
Image:Flag of the Republic of China.svg Republic of China (Taiwan)	$261 (October)
Image:Flag of South Korea (bordered).svg Republic of Korea (South Korea)	$229 (October)
Image:Flag of India.svg India	$173 (November 24¹)
Image:Flag of Singapore (bordered).svg Singapore	$131 (October)
Image:Flag of Hong Kong.svg Hong Kong	$131 (October)

Note:

Note 1: Russia and India update their information weekly and monthly.

These few holders account for more than 50% of total world foreign currency reserves. They regularly consult at the EAS on proposals such as the Asian Currency Unit, a possible future reserve currency.

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.