Foreign Exchange Reserve

A foreign exchange reserve is a store of foreign currency held by a government monetary authority or central bank in order to ensure that international transactions made in the currency it issues can be settled.

Foreign exchange reserves, in the strict sense of the term, must be comprised of base money issued by foreign monetary authorities. However, the term is often extended to include debt instruments like government bonds and foreign currency bank account balances.

The size of a country’s foreign exchange reserve and the currencies held in it determine that country’s ability to trade with other countries. The higher a country’s foreign exchange reserve and the more liquid the currencies making up the foreign exchange reserve are, the easier it will be for the government monetary authority or central bank to facilitate trade with other countries and for the government to pay interest on government bonds to foreign investors.

Switzerland has consistently held a very large foreign exchange reserve in relation to other countries, with the bulk of its reserves being held primarily in U.S. dollars, euros, Japanese yen and British pounds. Proportionately smaller reserves of Canadian dollars, Australian dollars, Chinese yuan, Danish krone, South Korean won, Singapore dollar and Swedish krona – among others – make up the rest of the Swiss foreign exchange reserve.

More on this topic:
Swiss National Bank

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