As can be seen from the meaning of foreign exchange, the relationship between foreign exchange reserves and exchange rate is very close. The increase in foreign exchange reserves means that the purchasing power of local currency has increased and the demand for local currency has increased, so that the appreciation trend of local currency can be obtained according to the supply and demand curve of local currency and foreign currency. In terms of monetary policy, the increase in foreign exchange reserves means that the central bank has purchased foreign assets with a large amount of local currency.

As a result, there is excess liquidity in the market, which raises interest rates, but it may appreciate externally and actually depreciate internally, because a large amount of local currency supply has pushed up the price index. Real prices offset the money supply.

A country always chooses the reserve currency on the premise that the foreign exchange rate of the reserve currency is relatively stable for a long time. If the balance of payments of the issuing country of a certain reserve currency deteriorates for a long time, the currency depreciates continuously and the exchange rate falls continuously, the position and function of the reserve currency will be weakened continuously, and even its position as a reserve currency will be lost.

Extended data:

major constituent

In order to meet the needs of international payment, foreign exchange held by central banks and other government agencies is foreign exchange reserves. Together with gold reserves, special drawing rights and readily available funds in the International Monetary Fund, it constitutes the sum of a country's official reserves (reserve assets).

1, main purpose

The main purpose of foreign exchange reserves is to pay off the balance of payments deficit, which is often used to intervene in the foreign exchange market and maintain the exchange rate of the domestic currency.

2. Main forms

There are short-term government deposits and other means of payment that can be cashed abroad, such as foreign securities, checks, promissory notes and foreign currency drafts of foreign banks. For a long time after World War II, the main currency of foreign exchange reserves in western countries was the US dollar, followed by the British pound. After 1970, German mark, Japanese yen, Swiss franc and French franc were added.

3. Statutory reserve ratio

In the total international reserve assets, the proportion of foreign exchange reserves is increasing. The amount of foreign exchange reserves, to a certain extent, reflects a country's ability to cope with the balance of payments, which is related to the maintenance and stability of its currency exchange rate. It is an important indicator to show a country's economic, monetary and international balance of payments strength.

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