What are reserve assets? Definition and significance

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A country’s reserve assets may include gold and foreign currencies.

What are reserve assets?

Reserve assets are assets held by a government that can be converted into cash in a short time and used for payments or to support its national currency. This type of asset can be held by a country’s central bank, its treasury or financial agency, or both.

What reserve assets does the United States hold?

The Federal Reserve tracks U.S. reserve assets, which come in the form of gold stock, special drawing rights, a reserve position in the International Monetary Fund, and foreign currencies. These reserves are generally held by the US Treasury.

Stock of gold

Gold stock refers to gold held by the US Treasury that can be used to mint coins. However, this does not include gold held in Federal Reserve banks on behalf of other countries and international accounts. Gold is at the price of its book valuewhich is the total number of troy ounces multiplied by the value set in 1973 at $42.222 per ounce.

Special drawing rights

Special drawing rights are a type of international monetary asset created by the IMF in 1969 to supplement the official reserves of member countries. It is based on a weighted basket of currencies, whose values ​​are based on market exchange rates at any given time. SDRs can be used to settle financial obligations between member countries and to grant loans.

Reserve position at the International Monetary Fund

The reserve position is the amount of its reserve tranche – which is the amount of foreign currency that the Treasury (or an IMF member country) can withdraw from the IMF in the short term – and any debt to the IMF.

Foreign currency

Foreign currencies are a way of holding cash denominated in other countries that can be converted into a country’s base currency. The US Treasury mainly holds euros and yen as foreign currencies. This is called international reserves.

Why are reserve assets important?

The dissolution of the Bretton Woods system in the 1970s brought about a new monetary system in which a country had to develop its reserve assets since gold was no longer the norm to back a nation’s currency.

A country holds reserve assets to help meet balance of payments needs. For example, a government may sell some of its reserve assets to devalue or support its currency. Selling foreign currency is a method a country can use to increase the value of its own currency through the foreign exchange market.

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