Economics
Foreign Currency Assets
Foreign currency assets refer to assets held in the form of foreign currencies, such as foreign bank deposits, government securities, and other financial instruments denominated in a foreign currency. These assets are typically held by central banks, governments, and financial institutions as a means of diversifying their investment portfolios and managing foreign exchange risk.
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4 Key excerpts on "Foreign Currency Assets"
eBook - PDF- Asbjørn Rødseth(Author)
- 2000(Publication Date)
- Cambridge University Press(Publisher)
Exports and imports are measured per unit of time – i.e. they are flows. Today, however, most trade in foreign currency is capital movements . Foreign currency is bought and sold in order to change the composition of asset portfolios. Large stocks of wealth can be shifted from one currency to another literally in seconds. In accord with this most modern theories of the foreign exchange market look upon the supply of foreign currency as a stock supply. The unit of measure-ment for quantity is then simply units of foreign currency – e.g. dollars (not dollars per unit of time). This is the modern approach that we shall pursue. In the stock approach the supply of foreign currency at a moment in time is determined by how the public decides to invest its wealth at this moment. Thus, the supply curve in figure 1.1 is a result of decisions by (domestic and foreign) private investors on how much of their wealth they want to keep in foreign currency at this moment. When the supply curve is increasing, it means that if the price of foreign currency is higher, the investors want to have smaller net holdings of assets denominated in foreign currency, and, thus, immediately offer more foreign currency to the central bank. 10 Financial markets Figure 1.1 Equilibrium in the foreign exchange market. The quantity Q is the net amount of foreign currency held by the central authorities. It consists of the official foreign exchange reserve minus the debt that the central authorities have incurred in foreign currency. For simplicity, we sometimes speak of the net amount of Foreign Currency Assets held by the central authorities as the ‘foreign exchange reserve’. When the authorities buy or sell foreign exchange, this is called intervention . The central bank can pursue different strategies in the foreign exchange market. One important alternative is ®xed exchange rates . Then the central bank sets a target exchange rate, which may be equal to E in figure 1.1.
- Claude Jonnard(Author)
- 2020(Publication Date)
- CRC Press(Publisher)
Foreign exchange reserves . A country’s reserves of foreign currencies. Commonly known as “quick cash,” they can be used immediately to finance imports and other foreign payables. Gold exchange standard . A modified gold standard stemming from a pledge by the United States in 1934 that it would buy back U.S. dollars held by foreign residents at US$35 per troy ounce of gold. Gold standard. A monetary system whereby currency was directly backed by a nation’s stock of gold officially held by a central government to finance international transactions and control the quantity of money in domestic circulation. Hard currency country. A country facing high domestic and international demand for its goods and services and whose government practices sound fiscal and monetary management will usually find itself with a currency that is universally acceptable, basically stable, and freely con -vertible. Such countries are often called “hard currency” states. International liquidity. A country’s official gold reserves, reserve position with the International Monetary Fund, special drawing rights, and foreign exchange reserves. A country draws on this liquidity (usually its foreign exchange reserves) to discharge its short-term international obligations (accounts payables). International monetary system. The system as it currently exists is an amalgamation or loose association of national central banks working through the International Monetary Fund to provide short - and long -term exchange rate stability. Pegged currencies. Many countries have currencies “pegged” to those of stronger economies. For example, the currencies of many Caribbean and West Indian nations are pegged to either the U.S. dollar or the U.K’s pound sterling. Soft currency country. A country whose goods and services are not in high demand, whose economy tends to be highly inflationary, and whose political and economic policies lead to instability and unrest will gen -
eBook - PDF- Peter J. Montiel(Author)
- 2015(Publication Date)
- Wiley-Blackwell(Publisher)
Since they can not print foreign exchange (only foreign central banks can do that) they often maintain a stock of foreign exchange reserves for this purpose, as we saw previously. These reserves take the form of financial assets that can quickly be turned into foreign currency, such as gold, liquid financial assets issued by foreign governments, the country’s reserve position at the IMF, and its stock of special drawing rights (SDRs). We will discuss the role of gold in Chapter 5 and of reserve positions at the IMF as well as of SDRs in Chapters 7 and 8. 11 Remember that we previously noted that the United States had a surplus on net investment income in 2007. How can this be, if the rest of the world owns more financial claims on the United States than the United States does on the rest of the world? One part of the answer is that the international investment position of the United States calculated by summing US current account deficits/surpluses over time probably understates the true value of IIP for the United States, because many of these assets are relatively old, and have probably increased substantially in market value over time. Another part is that a larger share of US claims on the rest of the world than of the rest of the world’s claims on the United States are in the form of high-yielding assets like FDI rather than lower-yielding ones like Treasury bills. 28 Foundations This means that the stock of foreign exchange reserves that a central bank holds determines its ability to buy its currency in the foreign exchange market. The importance of the overall balance of payments, which we denoted BOP above, emerges from this fact. Assuming that foreign central banks do not hold claims on the domestic economy, the relationship above indicates that BOP surpluses/deficits correspond to increases/decreases in the central bank’s liquid foreign assets.
eBook - PDFAsia In The Global Economy: Finance, Trade And Investment
Finance, Trade and Investment
- Ramkishen S Rajan, Sunil Rongala(Authors)
- 2008(Publication Date)
- World Scientific(Publisher)
4. Foreign purchases of US government securities (US$ billions) (1985–2006). Source : US Bureau of Economic Analysis. Note : Private purchases of government securities refer to purchase of US Treasuries. 2 This consists of US treasury and export–import bank obligations not included elsewhere, and of debt secu-rities of US government corporations and agencies. See Chapter 1 for a discussion of Asian reserves. Examining the breakdown of foreign purchases of US government secu-rities, it is instructive to note that between 2002 and 2004 about 60 percent of US government securities were purchased by foreign central banks and 40 percent by the private sector (Fig. 5). These proportions may substantially understate the actual magnitude of foreign central bank purchases (i.e., so-called “policy buying”), as some of the central banks have regularly invested though third parties (private brokers), or may have bought US fixed income assets in the foreign secondary market. 3 Foreign purchases of US government securities are generally considered a fairly stable source of cap-ital inflows as it reflects the demand for liquid and relatively risk-free assets. While official purchases are conducted by foreign central banks eager to channel some of their reserves into USD assets, private sector purchases are made by a number of longer-term institutional investors such as pension funds. Such investments in US government securities are considered rela-tively risk-free — a reflection of the role of the USD as a global reserve cur-rency. Thus, until and unless the USD ceases being viewed as a reserve currency, one will expect foreign purchases of US government securities to persist (see Conclusion).
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