Economics 101 – Foreign Exchange Reserves

Foreign exchange reserves consist of any foreign currency held by a centralized monetary authority, like the U.S. Federal Reserve. Foreign exchange reserves include foreign banknotes, bank deposits, bonds, treasury bills and other government securities.

Colloquially, the term can also encompass gold reserves or IMF funds. Foreign reserve assets serve a variety of purposes, but are primarily used to give the central government flexibility and resilience; should one or more currencies crash or become rapidly devalued, the central banking apparatus has holdings in other currencies to help them withstand such markets shocks.

Countries that must support their own currencies are generally cultivating large reserves, like China, Japan and the European Central Bank, to name the leaders. The UK isn't performance isn't too impressive nor is that of the USA, thanks probably to a mighty Dollar that still remains the reserve currency of choice.