Foreign exchange reserves
Foreign exchange reserves are stockpiles of foreign currencies held by governments.
Foreign exchange reserves are exactly that - stockpiles of foreign currencies held by governments. For many countries, especially in the emerging markets, the official foreign exchange reserves are both a major national asset and a crucial tool of monetary and exchange-rate policy, particularly in countries vulnerable to financial crises.
In many emerging markets, for example, a devaluation of a country's currency raises the cost of imports (and hence causes inflation) and of paying back debt denominated in foreign currency. With a large stockpile of reserves, a country's central bank can buy up its own currency in the foreign capital markets, helping to maintain its value. Large reserves are therefore considered to be an indication that a country's economy is capable of relative stability.
There is some debate about how much a country should hold in its reserves. Critics say that holding a lot of reserves is costly - the money could be put to better use making real investments in the economy, such as building roads. Others point out that this cost is nothing compared to the cost of a currency crisis should reserves get depleted.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
MoneyWeek is written by a team of experienced and award-winning journalists, plus expert columnists. As well as daily digital news and features, MoneyWeek also publishes a weekly magazine, covering investing and personal finance. From share tips, pensions, gold to practical investment tips - we provide a round-up to help you make money and keep it.
-
Zoopla: House prices slows to 1.4% in May as rate of sales at four year high
The average UK property now costs £268,400, Zoopla says, but some areas of the country are experiencing much higher price growth than others.
-
FCA reveals 'once in a generation' advice changes - what the reforms mean for you
Consumers to get free access to financial advice type help for pensions and investment following proposed changes from the regulator