Foreign currency reserves are vital to a nation’s economic well-being. Without adequate reserves, a country may be unable to pay for critical imports, such as crude oil, or service its external debt. Inadequate reserves can also limit a central bank’s available responses in the event of an economic crisis.
Foreign currency reserves can also be used to control exchange rates, which in turn affects global trade. If a currency, whether fixed or floating, begins to deviate from its desired rate with a foreign currency, the central bank can buy and sell reserves as needed to restore the intended exchange rate.
Foreign currencies are not the only form of asset at a government’s disposal. The International Monetary Fund (IMF) defines foreign reserves as external assets that a country’s monetary authority can use to meet the balance of payments financing needs, affect exchange rates in currency exchange markets, and other related purposes. These assets can include gold, special drawing rights (SDRs), and reserve positions in the IMF. However, foreign currency is the most abundant asset in most foreign reserves, and most nations hold the vast majority of their foreign currency reserves in U.S. dollars, followed by euros and the Japanese yen.
Key Takeaways
- Foreign exchange reserves are assets denominated in a foreign currency that are held by a nation’s government or central bank.
- These may include foreign currencies, bonds, treasury bills, and other government securities.
- Most foreign exchange reserves are held in U.S. dollars, with China being the largest foreign currency reserve holder in the world.
- The top foreign reserve holders tend to be countries in Asia and South Asia.
- The U.S. only holds a relatively small $242 billion in reserves as of Q2 2022.
Largest Foreign Reserves
Here are the 10 countries with the largest foreign currency reserve assets. All figures are as of June 2022.
Sources: IMF and *Central Bank of the Republic of China (Taiwan)
Note that the above table lists China’s and Hong Kong’s reserves separately. China has by far the largest foreign currency reserves with over two and a half times more than the second-largest reserve holder, Japan. When China’s and Hong Kong’s reserves are considered together, the total is nearly $4 trillion. Asian and South Asian nations dominate foreign currency reserves, accounting for 8 of the top 10.
Also note that Russia’s foreign exchange reserves totaled some $630 billion as of Q2 2022. However, economic sanctions imposed by the U.S., EU, and other nations in response to Russia’s invasion of Ukraine in February 2022 have rendered most of those reserves inaccessible to the central bank.
United States foreign currency reserves, which are mostly euros and yen, were valued at $242 billion in Q2 2022. The United Kingdom, which did not make the top 10 list, held $217 billion in foreign reserves as of June 2022.
Why Do Countries Hold Foreign Reserves?
Countries hold foreign reserves for several reasons including balancing international trade, intervening in the currency markets to stabilize the domestic currency, as liquidity in times of crisis, and to provide confidence for foreign and domestic investors.
Why Are China’s Foreign Reserves So Large?
China is a net exporter of goods, with much of that foreign trade being conducted in U.S. dollars. Chinese companies thus receive U.S. dollars but must convert them into Chinese currency via the banking system. The banks then reconcile these with the central bank. The central bank then uses the dollars to purchase U.S. government securities, which are considered to be among the safest investments on the planet.
Why Might a Country Run Out of Foreign Reserves?
A country might draw down its foreign reserves if it needs to sell them in order to stabilize its currency or prop up its economy, especially if the domestic currency falters.
The Bottom Line
Maintaining foreign currency reserves is vital to the economic health of a nation. The top 10 nations in terms of foreign currency reserves had combined reserve assets of $8.8 trillion as of December 2021, more than 40% of which was accounted for by China and Hong Kong.