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Foreign Exchange Reserves
Central banks hold foreign exchange reserves in different currencies to maintain the external value of their domestic currency and reduce the impact of economic problems. Foreign exchange reserves became popular after the decline of the gold standard as countries used them through central banks to stabilize exchange rates. Central banks can impact foreign exchange reserves through currency issuance, import/export restrictions, currency value fluctuations, and transferring reserves without affecting domestic currency value. The top foreign exchange reserve holdings are in US dollars, pounds, yen, francs, Canadian dollars, Australian dollars, and euros. Foreign exchange reserves boost confidence, help overcome economic crises, aid currency market control and stabilization, and indicate debt repayment ability and credit ratings. As of now, Pakistan holds $8.4
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Introduction to the topic of central banking and its relation to foreign exchange reserves.
Foreign exchange reserves are deposits held by a country's central bank in various currencies.
In the past, reserves were used to maintain currency values; the gold standard's decline made reserves crucial.
Central banks manage domestic currency issuance, currency restrictions, and value adjustments for stability.
Official reserves primarily consist of currencies like the U.S. dollar, Euro, and Japanese yen.
Reserves bolster confidence in monetary policies, assist during crises, and influence credit ratings.
Countries with largest reserves include China ($3.31T), Japan ($1.25T), and KSA ($626.8B).
Pakistan's reserves total $8.4 billion, with $3.6 billion held by the State Bank of Pakistan.
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Foreign Exchange Reserves
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- 3. Definition: Foreign exchange reservesare also called Forex or FX reserves and are the amount of foreign currency deposits that a country’s central bank holds. A nation’s central bank will have these reserves in different currencies. E.g. Dollar , Euro, Pound etc.
- 4. History : In thepast, during the Breton Woods system — an international monetary system formed after the second world war, foreign exchange reserves were used by countries through their central banks to maintain the external value of their currencies at fixed rate. Subsequently, with the collapse of this system, the focus changed to foreign exchange reserves.
- 5. Governments are ableto keep their currencies stable by holding the currencies of other nations as reserves; this also reduces the effect of economic problems. Once the gold standard declined, foreign exchange reserves became popular.
- 6. Central Bank Impacton Foreign Exchange Reserves 1. More Issuance of Domestic Currency 2. Restriction on Import and Export of Currencies. 3. Increase and decrease in value of Dollar or local currency. 4. It can transfer can transfer their reserves around to different assets without affecting the value of its domestic currency. 5. If a central bank decides to appreciate its local currency, it doesn't' t need to sell its reserve directly. E.g China
- 7. Currency Composition ofOfficial Foreign Exchange Reserves (COFER) U.S. dollar Pound sterling Japanese yen Swiss francs Canadian dollar Australian dollar, and Euro
- 8. Importance of ForeignExchange Reserves : 1.Confidence in the monetary and exchange rate policies of the government 2. During time of any crisis foreign exchange reserves come to the rescue of any country and to get rid of these crisis. 3. Its help the central bank to enhance the capacity of controlling the foreign exchange market and stabilize the foreign exchange rate.
- 9. 4. Foreign exchangereserves are important indicators of ability to repay foreign debt and for currency defense, and are used to determine credit ratings of nations. 5.Its increases the foreign investor confidence in the economy of having foreign exchange reserves .
- 10. Top 6 Countrieswith Highest Foreign Exchange Reserves 1. China $3.31 Trillion 2. Japan $1.25 Trillion 3.KSA $626.80 Billion 4. Russia $527.70 Billion 5. Switzerland 522.18 Billion 6. Taiwan 403.17 Billion
- 11. Foreign Exchange ReservesHeld by SBP(State Bank of Pakistan) is $3.6 Billion Foreign Exchange Reserves held by banks (Commercial Banks) other than SBP is $ 4.8 Billion Dollars. Currently Pakistan Held $8.4 Billion of Foreign Exchange Reserves