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.

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