Asked in Currency TradingWorld CurrenciesForeign Exchange (Forex)
How can a central bank use its currency reserves to support the value of its country's currency in the foreign exchange market?
October 10, 2009 11:19PM
Central banks use reserves in 2 ways:
1) They acquire (buy) foreign currency, often US Dollars, with their currency to keep their currency relatively weak and so enhance exports. This is what the US is acusing China of doing.
2) They use their foreign reserves to buy their own currency and support if from falling in value. This is what happened, with limited temporary success and eventual failure in Asian currencies, such as the Thai Baht, in 1997.