Foreign exchange reserves (also known as FX reserves) are the moneys held by a country’s central bank or monetary authority. Reserves can take the form of banknotes, special drawing rights (SDRs), bonds, bills, and gold. Foreign exchange reserves are used to balance payments related to trade, meet external debt obligations, and can be used to influence a country’s currency (i.e., exchange rate).
Ample foreign exchange reserves serve to maintain confidence in an economy’s financial markets. Moreover, sound reserve management policy can increase a country’s overall resilience to negative economic shocks.
In theory reserves can be held in any currency, but as the chart above highlights, the US Dollar makes up approximately 59% of Global foreign currency reserves. The euro, and the Yen are currencies with the second and third largest reserve holdings respectively. These Hard Currencies are from jurisdictions with reliable and/or stable legal and bureaucratic institutions, low levels of corruption, and an independent central bank.
A closer look at the chart also shows that records of foreign exchange reserves have not always been denominated by currency. “Unallocated” reserves used to represent 47% of the total (grey bars). However, in 2015, China subscribed to the IMFs Special Data Dissemination Standard (SDDS). Participation in the SDDS meant that China and other large Asian economies were required to begin allocating their foreign exchange reserve data to specific currencies, thus shifting the count from “Unallocated” to “Allocated”. Naturally, the proportion of Unallocated reserves fell as China slowly reclassified data and the dominance of the US Dollar revealed itself.