What are the uses of foreign exchange reserves for an economy?

Question

Definition of foregein exchange reserve?
Uses of foregein exchange reserve

Answer 1

Foreign exchange reserves are the foreign currency deposits held by national banks of different nations. These are assets of Governments which are held in different hard currencies such as Dollar, Sterling, Euro and Yen.

In other words is like a country is having foreign currency bank account.

The exchange reserves are not used to buy things from abroad. They are used for protection from economic crisis and currency depreciations. As you know every day the new exchange rates are announced. These rates are important because they determine how much money a country needs to buy goods from abroad and how much money it needs to service its external debt. If a currency gets depreciated the country will need more money for its imports and debt. This will make its economic planning more difficult and its economy weak. It will also be harder to pursuit economic growth.

In case of crisis or rapid depreciation of the currency the countries use their reserves to supply foreign currency and demand their local currency. Then the Law of Demand takes effect and the local currency either is not depreciated or is depreciated in a smaller degree.

It is really important, especially for weak economies and countries with large external debt to have large exchange reserves but as you understand it is difficult for the to gather so large amounts of money to be effective on their defense.

Answer 2

Ditto to CurioGirl. Foreign exchange reserves are savings which a country keeps in order to purchase imports amongst other things. They can even be sold to the citizens in the from of government bonds; when the markets are unstable the price of the bonds go up and interest rates rise.

Answer 3

A foreign exchange reserve is a pot of other countries' monies.

These are used to facilitate purchase of securities from foreign governments, and to help stabilize the domestic currency, although more so for the purpose of having a place to put the foreign monies received.

Answer 4

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Answer 5

i think its a measure of your value of exports to a particular country which in turn converts to FOREX reserves .these can be used for purchasing imports.

Answer 6

purchases in foreign countries!!!!!!