The Significance of the Foreign Exchange Reserves

Even if you are a newbie you have probably heard about the so called Foreign exchange market reserves. We will try to explain in the following article all the significant features of such Forex reserves and their impact on the global Forex trading system in general. So read further in order to find out more about these mysterious Forex reserves.

In fact there is nothing mysterious in the definition or functions of such Foreign exchange market reserves because they simply refer to the various foreign exchange notes and governmental debts which are held by the hugest world’s central bank organizations. Most of the world’s countries have their own Forex exchange market reserves which are used when it is necessary. By means of such reserves a country can impact on the exchange rates and on the import-export economy as well.

Speaking about more precise identification of the Foreign exchange market reserves, we should say the following: government representatives use such reserves in order to provide a proper amount of different international payments. The functions of such payments can be very different but mostly concern procuring of various services and products like raw materials, real estate objects and equipment for military forces. High reserves mean a country is rather powerful from the economical and financial point of view. As you may understand, every nation and government is very motivated to develop a strong and high Forex exchange market reserve. Having such a strong back-up a country can provide negotiations concerning reducing interest rates on a country’s debt and close the contracts with huge international partners on much better terms.

You may ask – what central bank organizations can get from suchForex exchange market reserves? And we answer – the officials get a chance to control exchange rates on their own domestic currency rates using reserves as strong financial back-ups and political tools. In order to make a domestic currency more stable and stronger a nation can spend a Foreign exchange reserve to purchase its own domestic banknotes. For sure, such activity will increase the demand for this currency which will lead to higher valuation rates. Or a country can use such a strong reserve to buy foreign banknotes in order to reduce the value of its domestic currency. Everything depends on the chosen strategy a country follows.

To make it easier for you - those nations which can boast stronger export economies are aimed at reducing the exchange rates making them weaker. In such way exported products become more affordable for foreign customers. Besides, a weak home currency can attract a buying interest for the security investments of a nation which become very cheap for foreign customers as well. So in order to attract more foreign potential customers and investors a nation with a strong foreign exchange market reserve can weaken a domestic currency on purpose.

As for the low exchange rates they set for home currency they can become inflationary due to the fact imports turn to be more expensive at home. If such situation occurs a central bank of this nation uses a FX exchange reserve to purchase a home currency and support in such way higher exchange rates under the circumstances when inflation turns into a concern