Welcome to illuminati silver, we tell you the truth about silver.
Today is Sunday 18th December 2016 and we are 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 knowledge
of; markets, foreign currencies and International currency trading issues.
So as a guide for those who are perhaps less experienced in these areas we thought we would
provide a brief definition and general guide as to what they are why such reserves are
important and how 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.
In general use, foreign currency reserves may also include gold and IMF reserves such
as SDR’s or Special Drawing Rights.
2 Main Reasons for Holding Foreign Currency Reserves 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’s
dollar reserves to buy its own currency on the foreign exchange markets.
The increased demand for this currency would appreciate its value.
An example of the opposite of this happening and to which President-Elect Trump has made
reference during the Election campaign, is the case of China who have historically been
trying to keep the Yuan undervalued by selling Yuan 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 reserves in excess of $3 trillion worth at the current
time.
2.
To act as a Guarantor for Liabilities such as External Debt.
If a country holds substantial foreign debt, holding foreign currency reserves can help
to give more confidence in the country’s ability to pay.
If countries have dwindling foreign currency reserves, there is likely to 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 / Government
depending on current exchange rates / monetary policy?
2.
International agreements: in the Bretton Woods system for example, countries tried to maintain
a certain level of foreign currencies to be able to protect the value of a currency.
In a floating exchange rate there is less need to hold foreign currency for protecting
against speculative attacks.
3.
Often an increase in foreign currency reserves may simply reflect a large current account
surplus and a desire to prevent the currency appreciating too much.
There are Problems however in holding Foreign Currency Reserves:
1.
Foreign Currency Reserves are rarely sufficient to target a certain exchange rate.
If speculators sell heavily, then a currency will fall despite the best efforts of a Central
Bank.
e.g. In 1992, the UK lost billions of pounds 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 the time when the much maligned George Soros made a $1 billion in betting against
the Bank of England.
2.
Inflation Erodes Value.
The problem with holding foreign currency reserves is that they can lose their value.
Inflation erodes the value of currencies not fixed against gold for example.
Therefore, a Central Bank will need to keep buying foreign reserves to maintain the same
purchasing power in markets.
3.
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 the
value 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 policy
of selling its US Dollar foreign currency reserves, such as China has recently, rather
than assuming it’s because it no longer has confidence in that currency, which many
of the gold and silver pumpers would have you believe, which admittedly could be one
reason, it could also be because it is trying to maintain or prop up the value of its own
currency - the Yuan - for which it has exchanged those dollars or even taking profits on some
of the reserves it owns, especially when the dollar is gaining strength.
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Disclaimer:
Illuminati Silver owners come from a background of Banking, International Wealth Management
and Economics.
Having now retired from these worlds we are not qualified to give investment advice.
Therefore, this and other productions must not be deemed to be giving such advice and
merely represent the personal views of its owners.