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Encyclopedia > Foreign exchange reserves
Foreign Exchange

Exchange Rates
Currency band
Exchange rate
Exchange rate regime
Fixed exchange rate
Floating exchange rate
Linked exchange rate
In finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. ... Image File history File links Forex. ... The currency band is a system of exchange rates by which a floating currency is backed by hard money. ... The exchange rate regime is the way a country manages its currency in respect to foreign currencies and the foreign exchange market. ... A fixed exchange rate, sometimes (less commonly) called a pegged exchange rate, is a type of exchange rate regime wherein a currencys value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. ... A floating exchange rate or a flexible exchange rate is a type of exchange rate regime wherein a currencys value is allowed to fluctuate according to the foreign exchange market. ... A linked exchange rate system is a type of exchange rate regime to link the exchange rate of a currency to another. ...

Markets
Foreign exchange market
Futures exchange
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ... The introduction to this article provides insufficient context for those unfamiliar with the subject matter. ...

Products
Currency
Currency future
Non-deliverable forward
Forex swap
Currency swap
Foreign exchange option
A currency future, also FX future or foreign exchange future, is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the last trading date. ... This article is about the financial instrument. ... Forex swap is an over the counter short term interest rate derivative instrument. ... A currency swap is a foreign exchange agreement between two parties to exchange a given amount of one currency for another and, after a specified period of time, to give back the original amounts swapped. ... In finance, a foreign exchange option (commonly shortened to just FX option or currency option) is a derivative financial instrument where the owner has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. ...

See also
Bureau de change
A bureau de change is an organisation or facility which allows customers to exchange one currency for another. ...

Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits held by central banks and monetary authorities. However, the term foreign exchange reserves in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve position as this total figure is more readily available, however it is accurately deemed as official reserves or international reserves. 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, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions. GOLD refers to one of the following: GOLD (IEEE) is an IEEE program designed to garner more student members at the university level (Graduates of the Last Decade). ... Special Drawing Rights (SDRs) is a potential claim on the freely usable currencies of International Monetary Fund members. ... The flag of the International Monetary Fund (IMF) The International Monetary Fund (IMF) is the international organization entrusted with overseeing the global financial system by monitoring foreign exchange rates and balance of payments, as well as offering technical and financial assistance when asked. ... This article is about the business definition. ... 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. ... USD redirects here. ... For other uses, see Euro (disambiguation). ... Japanese 10 yen coin (obverse) showing Phoenix Hall of Byodoin Yen is the currency used in Japan. ... Bank reserves are banks holdings of deposits in accounts with their central bank (for instance the European Central Bank or the Federal Reserve, in the later case called federal funds), plus currency that is physically held in banks vaults (vault cash). ... This article does not cite any references or sources. ... A financial institution acts as an agent that provides financial services for its clients. ...

Contents

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 U.S. later abandoned the gold standard, but the dollar has remained relatively stable as a fiat currency, and it is still the most significant reserve currency. Central banks now typically hold large amounts of multiple currencies in reserve. GOLD refers to one of the following: GOLD (IEEE) is an IEEE program designed to garner more student members at the university level (Graduates of the Last Decade). ... // Gold ingots, like these from the Bank of Sweden, form the base of many monetary systems Gold reserves (or gold holdings) are held by central banks as a store of value. ... Wikipedia does not have an article with this exact name. ... USD redirects here. ... Look up fiat in Wiktionary, the free dictionary. ...


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. Large reserves are 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. A fixed exchange rate, sometimes (less commonly) called a pegged exchange rate, is a type of exchange rate regime wherein a currencys value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold. ... In the most general sense, a liability is anything that is a hindrance, or puts individuals at a disadvantage. ... Volatility most frequently refers to the standard deviation of the change in value of a financial instrument with a specific time horizon. ... A monetary system secures the proper functioning of money by regulating economic agents, transaction types, and money supply. ... Look up flipping in Wiktionary, the free dictionary. ... A poster for the 1896 Broadway melodrama The War of Wealth depicts a typical 19th century bank panic in the U.S. A bank run (also known as a run on the banks) is a type of financial crisis. ... Default is the name of a number of quite different concepts. ... A currency crisis (also known as a financial crisis) occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value. ...


Central banks sometimes claim that holding large reserves is a security measure. This is true to the extent that a central bank can prop up its own currency by spending reserves. (This practice is essentially large-scale manipulation of the global currency market. Central banks have sometimes attempted this in the years since the 1971 collapse of the Bretton Woods system. A few times, multiple central banks have cooperated to attempt to manipulate exchange rates. It is unclear just how effective the practice is.) But often, very large reserves are not a hedge against inflation but rather a direct consequence of the opposite policy: the bank has purchased large amounts of foreign currency in order to keep its own currency relatively cheap. Wikipedia does not have an article with this exact name. ...


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 fixed 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) to maintain the targeted exchange rate within the prescribed limits.


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, 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 stricly limit foreign exchange interventions, however, often recognize that currency markets can be volatile and may intervene to counter disruptive short-term movements. A floating exchange rate or a flexible exchange rate is a type of exchange rate regime wherein a currencys value is allowed to fluctuate according to the foreign exchange market. ...


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) 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). It has been suggested that monetary theory be merged into this article or section. ...


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 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. Devaluation is a reduction in the value of a currency with respect to other monetary units. ...


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 and benefits

On one hand, if a country desires to have a government-influenced exchange rate, then holding bigger reserves gives the country a bigger ability to manipulate the currency market. On the other hand, holding reserves does induce opportunity cost. The "quasi-fiscal costs" of holding reserves are the gap between the low-yield assets that returns managers typically hold, and the average cost of government debt in the country. In addition, many governments have suffered huge losses on the management of the reserves portfolio - all of which is ultimately fiscal. When there is a currency crisis and all reserves vanish, this is ultimately a fiscal cost. Even when there is no currency crisis, there can be a fiscal cost, as is taking place in 2005 and 2006 with China, which holds huge USD assets but the RMB has been continually appreciating. The renminbi (Traditional Chinese: 人民幣, Simplified Chinese: 人民币, literally means peoples currency) is the official currency of the Peoples Republic of China. ...


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. If those were included, Norway and Persian Gulf States would rank higher on these lists, and UAE's $1.3 trillion Abu Dhabi Investment Authority would be second after China. Singapore also has significant government funds including Temasek Holdings and GIC. India is also planning to create its own investment firm from its forex reserves. Stabilization fund may refer to: Exchange Stabilization Fund Stabilization Fund of the Russian Federation Petroleum Fund of Norway (SPF) Chiles Copper Stabilization Fund (CSF) Omans State General Reserve Fund (SGRF) Kuwaits Reserve Fund for Future Generations (RFFG) Papua New Guineas Mineral Resources Stabilization Fund (MRSF) Venezuela... Sovereign wealth fund (SWF) (Sovereign wealth funds) is a fund owned by a state composed of financial assets such as stocks, bonds, property or other financial instruments. ... It has been suggested that this article or section be merged into Cooperation Council for the Arab States of the Gulf. ... UAE redirects here; for other uses of that term, see UAE (disambiguation) The United Arab Emirates is an oil-rich country situated in the south-east of the Arabian Peninsula in Southwest Asia, comprising seven emirates: Abu Dhabi, Ajman, Dubai, Fujairah, Ras al-Khaimah, Sharjah and Umm al-Quwain. ... The Abu Dhabi Investment Authority (ADIA) is one of the biggest government investment authorities in the world. ... Temasek Holdings is the investment arm of the Singapore government and owned 100% by the Ministry of Finance. ... The Government of Singapore Investment Corporation (GIC) is a global investment management company established in 1981 to manage Singapores foreign reserves. ...


Levels

Reserves of foreign exchange and gold in 2006
Reserves of foreign exchange and gold in 2006

At the end of 2006, 65.7% of the identified official foreign exchange reserves in the world were held in United States dollars and 25.2% in euros [1]. Image File history File links GM_-_ForexReserves. ... Image File history File links GM_-_ForexReserves. ... USD redirects here. ... For other uses, see Euro (disambiguation). ...

Monetary Authorities with the largest foreign reserves in 2007.
Rank Country/Monetary Authority billion USD (end of month)
1 Flag of the People's Republic of China People's Republic of China $1434 (September) [1]
2 Flag of Japan Japan $946 (September)
Flag of Europe Eurozone $453 (August)
3 Flag of Russia Russia $440 (October 19) [2]
4 Flag of the Republic of China Republic of China (Taiwan) $263 (September)
5 Flag of India India $261 (October 19) [3]
6 Flag of South Korea South Korea $257 (September)
7 Flag of Brazil Brazil $167 (October 25) [4]
8 Flag of Singapore Singapore $152 (September)
9 Flag of Hong Kong Hong Kong $141 (September)
10 Flag of Germany Germany $126 (September)

Note: Image File history File links Flag_of_the_Peoples_Republic_of_China. ... Image File history File links Flag_of_Japan. ... Image File history File links This is a lossless scalable vector image. ... The Eurozone (also called Euro Area, Eurosystem or Euroland) refers to the European Union member states that have adopted the euro currency union. ... Image File history File links Flag_of_Russia. ... Image File history File links Flag_of_the_Republic_of_China. ... For the Chinese civilization, see China. ... Image File history File links Flag_of_India. ... Image File history File links Flag_of_South_Korea. ... Image File history File links Flag_of_Brazil. ... Image File history File links Flag_of_Singapore. ... Image File history File links Flag_of_Hong_Kong. ... Image File history File links Flag_of_Germany. ...

  1. ^ China updates its information quarterly.
  2. ^ Russia updates its information weekly and monthly.
  3. ^ India updates its information weekly.
  4. ^ Brazil updates its information Daily.

These few holders account for more than 50% 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

Reserves of foreign exchange and gold in 2006 Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits held by central banks and monetary authorities. ... The balance of payments is a measure of the payments that flow from one exports and imports of goods, services, and financial capital, as well financial transfers. ... // Gold ingots, like these from the Bank of Sweden, form the base of many monetary systems Gold reserves (or gold holdings) are held by central banks as a store of value. ... 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. ... Special Drawing Rights (SDRs) is a potential claim on the freely usable currencies of International Monetary Fund members. ... Sovereign wealth fund (SWF) (Sovereign wealth funds) is a fund owned by a state composed of financial assets such as stocks, bonds, property or other financial instruments. ...

External links

Source

  • IMF's data on current foreign exchange reserves of reporting countries
  • The World Factbook, CIA
  • Taiwan's Department of Investment Services data on foreign exchange reserves of major countries
  • Bank of Korea's top ten foreign exchange reserves holding countries monthly
  • Hong Kong Monetary Authority's top ten foreign exchange reserves holding countries monthly
  • European Central Bank data on eurosystem reserves

Articles

  • Guidelines for foreign exchange reserve management Accompanying Document 1 Document 2 Appendix
  • A primer on exchange reserves
  • An empirical analysis of foreign exchange reserves in emerging Asia -- December 2005
  • Foreign exchange reserves: issues in asia -- January 2005
  • Foreign exchange reserves in east asia: why the high demand? -- April 25, 2003
  • Optimal currency shares in international reserves
  • The adequacy of foreign exchange reserves

Speeches

  • Alan Greenspan: discusses recent trends in the management of foreign exchange reserves -- April 29, 1999
  • Y V Reddy: India’s foreign exchange reserves - policy, status and issues -- May 10, 2002
  • Marion Williams: foreign exchange reserves - how much is enough? -- November 02, 2005

  Results from FactBites:
 
China's foreign exchange reserves (298 words)
At the start of the reform era at the end of 1978, China's foreign exchange reserves were minimal, but enough to cover the requirements of a country with a very small import bill.
The economic slowdown of 1989-91 produced a sharp fall in imports in 1990, while exports continued to rise, producing a merchandise trade surplus for that year of US$9.2bn, which was gradually eroded in the next three years as imports rose faster than exports.
By 1993 the trade and current accounts were in deficit, but the acceleration in inward FDI flows kept foreign exchange reserves rising for most of the rest of the decade.
Foreign exchange reserves - Wikipedia, the free encyclopedia (451 words)
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.
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.
  More results at FactBites »

 
 

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