Foreign Reserve-Definition

Definition

Foreign exchange reserves in a strict sense are only the foreign currency deposits held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. By definition, foreign reserves are external assets that are readily available to and controlled by monetary authorities for direct financing of payments imbalances, for indirectly regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/ or for other purposes. This broader figure is more readily available, but it is more accurately termed official reserves or international reserves. These are assets of the central bank held in different reserve currencies, such as the dollar, euro and 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.

Reserves were formerly held only in gold, as official gold reserves. 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. In 1971, however, the U. S. abandoned the convertibility of dollars to gold,and the dollar became a fiat currency. Since then, all major currencies have removed convertibility to gold, resulting in a general devaluation of world currencies over time. The dollar has remained the most significant reserve currency, though central banks now typically hold large amounts of multiple currencies in reserve.