Economics Project on Significance of Foreign Exchange Reserve

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History
The modern exchange market as tied to the prices of gold began during 1880. Of this year the countries significant by size of reserves were Austria, Belgium, Canada, Denmark, Finland, Germany and Sweden. [4][5] Official international reserves, the means of official international payments, formerly consisted only of gold, and occasionally silver. But under the Bretton Woods system, the US dollar 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.

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List of countries by foreign-exchange reserves
See also: List of countries by foreign-exchange reserves

Reserves of SDR, forex and gold in 2006
The following is a list of the top largest systems by foreign exchange reserves: Rank| Country| Billion USD (end of month)|
1|  People's Republic of China| $ 3,285 (Sep 2012)[7]|
2|  Japan| $ 1,274 (Oct 2012)[8]|
-|  Eurozone| $ 903 (Aug 2012)[9] [10]|
3|  Saudi Arabia| $ 614 (Aug 2012)[11]|
4|  Switzerland| $ 530 (Oct 2012)[12]|
5|  Russia| $ 527 (Oct 2012)[13]|
6|  Republic of China (Taiwan)| $ 399 (Oct 2012)[14]|
7|  Brazil| $ 378 (Oct 2012)[15]|
8|  South Korea| $ 323 (Oct 2012)[16]|
-|  Hong Kong| $ 298 (Aug 2012)[16]|
9|  India| $ 295 (Oct 2012)[16]|
10|  Germany| $ 263 (Sep 2012)[16]|
The following is a list of inter-governmental free-trade associations and supranational organizations. Rank| Country| Billion USD (end of month)|
|  European Economic Area| $ 1 416 (Feb 2011)|
|  European Union| $ 1 356 (Feb 2011)
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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. -------------------------------------------------

Foreign-exchange reserves
Foreign-exchange reserves (also called forex reserves or FX reserves) in a strict sense are 'only' the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, special drawing rights (SDRs), and International Monetary Fund (IMF) reserve positions. This broader figure is more readily available, but it is more accurately termed official international reserves or international reserves. These are assets of the central bank held in different reserve currencies, mostly the United States dollar, and to a lesser extent the euro, the United Kingdom pound sterling, and the Japanese yen, and 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.

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Purpose
In a flexible exchange rate system, official international reserve assets allow a central bank to purchase the domestic currency, which is considered a liability for the central bank (since it prints the money or fiat currency as IOUs). This action can stabilize the value of the domestic currency.[citation needed] Central banks throughout the world have sometimes cooperated...
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