Foreign reserves are the foreign currencies held by a state bank in different countries. These reserves are kept in order to stabilize their trade with other countries as well as by this means countries get a chance to boost their economic ability on both local and international levels. These foreign currencies are used to support the central bank’s liabilities, such as the local currency that is issued, the reserves deposits of various money banks, government or other financial institutions.
International reserves also support monetary and foreign exchange policies in order to safeguard currency stability and the everyday activities of domestic and external payment systems including external debts. In the beginning, foreign reserves were held in the form of gold, but with the advent of the Bretton Wood system, the US dollar was pegged to gold and eventually the gold standard was abandoned. Hence, the dollar became the most significant reserves currency.
Countries in the world usually hold international reserves to support their economies by having a favourable level of exchange rate especially with the goal of stabilizing it and maintaining other economic activities within the country and with other countries as well. Currently, it is argued that the foreign currency reserve position determines the country’s competitiveness and value of its currency in the global market.