domestic currency

Foreign exchange reserves (also referred to as Forex reserves) in a strict sense are only the foreign currency deposits and bonds that are held by central banks and monetary authorities. However, commonly foreign exchange and gold, SDRs and IMF reserve positions are included in the term in popular usage.

This broader figure is more readily available, but more accurately it is referred to as official international reserves or international reserves. These are assets of the central bank that the central bank holds in different reserve currencies, mostly in the US dollar, and to a lesser extent in the euro, the UK pound, and the Japanese yen, and it is used to back its liabilities, e.g. the local currency issued, and the various bank reserves that are deposited with the central bank, by the government or financial institutions.

History

Official international reserves, that were the means of official international payments, formerly consisted only of gold, and occasionally silver. But under the Bretton Woods system, the US dollar functioned as a reserve currency, so the US dollar also became part of a nation’s official international reserve assets. From 1944-1968, through the Federal Reserve System the US dollar was convertible into gold, but after 1968 only central banks were able to convert dollars into gold from official gold reserves, and after 1973 no individual or institution has the permission to convert US dollars into gold from official gold reserves.

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