Welcome to illuminati silver, we tell youthe truth about silver.
Today is Sunday 18th December 2016 and weare providing an explanation as to what Foreign Currency Reserves are and why they are important.
We are too well aware that many of our subscribers have differing experiences with and knowledgeof; markets, foreign currencies and International currency trading issues.
So as a guide forthose who are perhaps less experienced in these areas we thought we would provide abrief definition and general guide as to what they are why such reserves are important andhow various Governments use them.
Foreign Currency Reserves (Forex Reserves)is the amount of foreign currencies that are held by the Central Bank of a country.
Ingeneral use, foreign currency reserves may also include gold and IMF reserves such asSDR’s or Special Drawing Rights.
2 Main Reasons for Holding Foreign CurrencyReserves are: 1.
To influence the exchange Rate.
With large foreign exchange reserves, a country can target a certain exchange rate.
For example, suppose a country wanted to increase the value of its currency, it could sell it’sdollar reserves to buy its own currency on the foreign exchange markets.
The increaseddemand for this currency would appreciate its value.
An example of the opposite of this happeningand to which President-Elect Trump has made reference during the Election campaign, isthe case of China who have historically been trying to keep the Yuan undervalued by sellingYuan and buying Dollars thereby improving their export prospects to overseas markets– by flooding them with ‘cheap goods’.
This is why China has so many Dollar reservesin excess of $3 trillion worth at the current time.
To act as a Guarantor for Liabilities suchas External Debt.
If a country holds substantial foreign debt,holding foreign currency reserves can help to give more confidence in the country’sability to pay.
If countries have dwindling foreign currency reserves, there is likelyto be deterioration in a country’s credit worthiness.
So Who Decides a Country’s Foreign Currency Reserve?1.
The amount of foreign currency reserves will be decided by the Central Bank / Governmentdepending on current exchange rates / monetary policy? 2.
International agreements: in the BrettonWoods system for example, countries tried to maintain a certain level of foreign currenciesto be able to protect the value of a currency.
In a floating exchange rate there is lessneed to hold foreign currency for protecting against speculative attacks.
Often an increase in foreign currency reservesmay simply reflect a large current account surplus and a desire to prevent the currencyappreciating too much.
There are Problems however in holding ForeignCurrency Reserves: 1.
Foreign Currency Reserves are rarely sufficientto target a certain exchange rate.
If speculators sell heavily, then a currencywill fall despite the best efforts of a Central Bank.
In 1992, the UK lost billions ofpounds trying to protect the value of Sterling when it was in the Exchange Rate Mechanism.
Eventually, the UK authorities had to admit defeat and devalue the pound.
This was thetime when the much maligned George Soros made a $1 billion in betting against the Bank ofEngland.
Inflation Erodes Value.
The problem withholding foreign currency reserves is that they can lose their value.
Inflation erodesthe value of currencies not fixed against gold for example.
Therefore, a Central Bankwill need to keep buying foreign reserves to maintain the same purchasing power in markets.
They may lose Money on Currency Changes.
In theory a Central Bank can make money through the appreciation of other currencies it holds.
However, many Central Banks have been losing money through the long term decline in thevalue of the dollar for example, though recently this situation has reversed.
Knowing all of this now, hopefully when you hear that a country has embarked on a policyof selling its US Dollar foreign currency reserves, such as China has recently, ratherthan assuming it’s because it no longer has confidence in that currency, which manyof the gold and silver pumpers would have you believe, which admittedly could be onereason, it could also be because it is trying to maintain or prop up the value of its owncurrency – the Yuan – for which it has exchanged those dollars or even taking profits on someof the reserves it owns, especially when the dollar is gaining strength.
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Com/illuminatisilver Disclaimer: Illuminati Silver owners come from a backgroundof Banking, International Wealth Management and Economics.
Having now retired from theseworlds we are not qualified to give investment advice.
Therefore, this and other productionsmust not be deemed to be giving such advice and merely represent the personal views ofits owners.