Part two. The second way by which a country can accumulate foreign reserves is for it to become an attractive destination, for tourists and foreign businesses. These tourists and foreign businesses come to the country and spend money, in a foreign currency, and over time, that can build into good foreign reserves. Singapore is a good example of such a country - strong on both tourism as well as in attracting foreign businesses.
Foreign reserve is defined as amount of foreign currency that a country's central bank possess. For example, Reserve Bank of India have 392,078.7 Million US dollar as foreign currency reserve as on 26 October 2k18.
US dollar is acceptable because it has become global currency due to strong economic growth of USA. This is when, foreign reserve comes into picture.
Holding foreign exchange merely gives the central bank the ability to interfere in the Foreign Exchange Market and manipulate the price of its currency. But it is only to quell volatility. You can not hold up your currency value if others do not want it. If you have nothing to export why will people want your money.
With few foreign reserves, a government can buy fewer capital goods to boost the country’s economy in the long run and fewer materials the country lacks yet necessary for production . Purchasing imports could increase production resources and boost the economy. Other payments such as international aid and interest payments cannot be paid either.
Applies to countries too! A country “earns” by selling (i.e. exporting) stuff to other countries. It can sell goods, and those goods can range from raw materials such as iron ore or agricultural products, all the way to defence equipment. A country can also sell “services”, such as financial or consulting services, to other countries. It then gets foreign exchange in return for those sales.
No country is bound to stock foreign exchange.
Resources used intensively in export industries (such as labor in China and capital in the United States) will see an increase in their returns, whereas the resources used intensively in import-competing industries will see a decline in their return.
Chile and the United States use capital and labor to produce wheat and automobiles. The united States is capital abundant, and Chile is labor abundant. Wheat production is more labor intensive than automobile production. Accordinf to the Stolper-Samuelson theorem:
The countries use their foreign reserves to keep their currency’s value at a fixed rate. An example of the same is given above. Countries with a floating exchange rate system use FX reserves to keep the value of their currency less than the US dollar. For example, Japan follows a floating system. The central bank of Japan buys US treasury so that the Yen stays below the Dollar.
Foreign exchange reserves are the assets of other countries held by the central bank of a country. The reasons for doing so are plenty. The Foreign Exchange Reserves has its influence in determining the monetary policy. FX reserves can control the rate of a currency and can use to stabilize the same.
Typically, countries hold the US dollar as their forex reserves because it is the most traded currency in the world. Apart from that, the Great Britain Pound, Chinese Yuan, Euro region’s Euro, and Japanese Yen are the currencies that are held as FX reserves.
Foreign exchange reserves are important to investors as it controls the supply and demand of the currency in the forex market. Knowing that central banks try keeping the currency values stabilized, we take advantage of this and try predicting the value of a currency pair.
Another critical function of the reserves is to maintain liquidity in case of economic crises. For instance, a natural calamity might bring a halt to local exporter’s ability to produce goods. This cuts off their supply of foreign currency to pay for imports. In such scenarios, central banks can get their local currencies in exchange for the foreign currency they have. Hence, this allows them to pay for and receive imports.
There are plenty of reasons why central banks hold reserves. And the most important reason is to control their currencies’ values. The reserves act as a backup for their liability. From an economic point of view, it essentially influences the monetary policy.
Traders and investors need the data of foreign exchange reserves to make their investments. And this data is publicly available for free. Below are the portals to access the reports on the Forex reserves of different countries. Apart from the current data, one can access the historical data with graphical charts as well.