How do foreign exchange reserves stabilize the local currency exchange rate? Ask for answers, and be detailed. . thank you
Currency exchange rate is determined by the relationship between supply and demand of money in the market. When the supply of domestic currency exceeds demand, the currency will depreciate, and vice versa. If the local currency depreciates, foreign exchange reserves will be used to buy local currency in the market, so as to reduce its supply and restore the local currency exchange rate. If the domestic currency appreciates, it can be sold in the market to stabilize the exchange rate.