# Understanding Foreign Exchange Reserves: Key Purposes and Global Impact

![Foreign Exchange Reserves](https://www.investopedia.com/thmb/yquwDwRB62qUIVr6gi5TJMSpwgw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/foreign-exchange-reserves.asp-final-903ad3568b0049d49a0ef043d39149e1.jpg)

*— Investopedia / Eliana Rodgers*

> **Definition**
>
> Foreign exchange reserves are foreign currency assets held by a central bank to back liabilities and influence monetary policy.

## What Are Foreign Exchange Reserves?

Foreign exchange reserves are assets denominated in a foreign currency held by a central bank. These reserves are used to back liabilities and influence monetary policy.

Foreign exchange reserves can include [banknotes](https://www.investopedia.com/terms/b/banknote.asp), deposits, bonds, [treasury bills](https://www.investopedia.com/terms/t/treasurybill.asp), and other government securities. They mainly serve as backup funds for a central government if its currency loses value or becomes insolvent.

### Key Takeaways

*   Foreign exchange reserves are assets held by a country's central bank in foreign currencies, bonds, and other securities.
*   The reserves of most countries are in U.S. dollars, and China holds the largest amount of foreign currency reserves globally.
*   Reserves are crucial for stabilizing a national currency and supporting monetary policy during economic uncertainties.
*   Economists recommend holding reserves in currencies not directly linked to a country's own currency to mitigate market shocks.

## Why Countries Hold Foreign Exchange Reserves

Central banks worldwide commonly hold significant foreign exchange reserves. Most of these reserves are held in the U.S. dollar since it is the most traded [currency](https://www.investopedia.com/terms/c/currency.asp) in the world. It is not uncommon for the foreign exchange reserves to be made up of the British pound (GBP), the euro (EUR), the Chinese yuan (CNY) or the Japanese yen (JPY) as well.

Economists advise holding reserves in currencies not tied to the local currency, to guard against market shocks. However, this practice has become more difficult as currencies have become increasingly intertwined as global trading has become easier.

> **Important**
>
> Foreign exchange reserves are not only used to back liabilities but also influence monetary policy﻿.

## Real-World Examples of Foreign Exchange Reserves

The world's largest current foreign exchange reserve holder is China, a country holding more than $3 trillion of its assets in a foreign currency. Most of its reserves are held in the U.S. dollar. Such an arrangement makes international trade easier to execute since most of the trading takes place using the U.S. dollar.

Saudi Arabia holds significant foreign reserves because it relies on oil exports. A rapid drop in oil prices could harm its economy. It keeps large amounts of foreign funds in reserves to act as a cushion should this happen.

> **Fast Fact**
>
> U.S. foreign exchange reserves totaled over $244 billion as of the last week of July 2024.

Like many countries, Russia mainly holds its foreign reserves in U.S. dollars, but it also keeps some in gold. The risk with relying on gold during a Russian economic decline is that its value may not support the country's needs. As of February 2022, Russia's foreign exchange reserves totaled some $630 billion. However, sanctions imposed by the European Union (EU), the U.S., and other nations in response to Russia's invasion of Ukraine in February 2022 rendered most of those reserves inaccessible to the central bank.

The risk of using gold as a reserve is that its value depends on what buyers are willing to pay. During an economic crash, this puts control of its value—and Russia's financial fallback—in the hands of buyers.

## How Much in U.S. Treasuries Does China Hold?

As of May 2024, China held $768.3 billion in U.S. Treasury securities, making it the second-largest foreign holder of U.S. debt after Japan.

## Who Has the Largest Foreign Exchange Reserves in the World?

According to an [analysis of foreign exchange reserves](https://www.investopedia.com/articles/investing/033115/10-countries-biggest-forex-reserves.asp), China has the largest foreign exchange reserve in the world, holding over $3.6 trillion. Japan came in second, holding $1.3 trillion, and Switzerland followed with $890 billion.

## How Much Money Total Is Held in Foreign Exchange Reserve?

According to the latest available data, the total value of all foreign exchange reserves equaled nearly $12.35 trillion dollars in the first quarter of 2024. That number represents a slight increase from the same period in 2023.

## The Bottom Line

Foreign exchange reserves are foreign-denominated assets held by a central bank for the purpose of backing liabilities and influencing monetary policy.

Foreign exchange reserves can take many forms, including cash and bonds. They can provide a buffer in times of crisis, should a country's own currency lose value or it suffer another form of economic crisis. They are typically held in various instruments, such as foreign currencies, bonds, and treasury bills.

Some countries, such as Saudi Arabia and Russia, utilize their reserves for economic stability.

> **Article Sources**
>
> 1.  Board of Governors of the Federal Reserve System. “[The International Role of the U.S. Dollar](https://www.federalreserve.gov/econres/notes/feds-notes/the-international-role-of-the-u-s-dollar-20211006.htm).”
>     
> 2.  Federal Reserve Bank of St. Louis. “[Total Reserves Excluding Gold for China](https://fred.stlouisfed.org/series/TRESEGCNM052N).”
>     
> 3.  Neely, Christopher J. “[Chinese Foreign Exchange Reserves and the U.S. Economy](https://files.stlouisfed.org/files/htdocs/publications/economic-synopses/2016-05-06/chinese-foreign-exchange-reserves-and-the-u-s-economy.pdf).” _The Federal Reserve Bank of St. Louis_, no 9, 2016, pp. 1.
>     
> 4.  International Monetary Fund. “[Economic Diversification in Oil-Exporting Arab Countries](https://www.imf.org/external/np/pp/eng/2016/042916.pdf),” Page 7.
>     
> 5.  U.S. Department of Treasury. "[U.S. International Reserve Position - July 26, 2024.](https://home.treasury.gov/data/us-international-reserve-position/07262024)"
>     
> 6.  Bank of Russia. “[International Reserves of the Russian Federation (End of Period)](https://cbr.ru/eng/hd_base/mrrf/mrrf_m/).”
>     
> 7.  Financial Times. "[Russia's FX Reserves Slip from Its Grasp](https://www.ft.com/content/526ea75b-5b45-48d8-936d-dcc3cec102d8)."
>     
> 8.  Department of Treasury. "[Major Foreign Holders of Treasury Securities](https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/slt_table5.html)."
>     
> 9.  International Monetary Fund. "[Currency Composition of Official Foreign Exchange Reserve](https://data.imf.org/?sk=e6a5f467-c14b-4aa8-9f6d-5a09ec4e62a4)."