Reserves is a general term used to refer to the foreign currency and other convertible assets a government keeps for dealings with other nations. Rather than keeping a supply of currency from every nation, a majority of countries focus on a few widely traded currencies. The U.S. dollar is one of the most widely held reserve currencies, followed by the euro and the British pound.
International trade requires banks to create reserves of currencies. Without reserves of foreign currency, an exporter wouldn't be able to convert foreign currency into the domestic currency needed to pay employees and other costs related to the business. Instead of each bank holding reserves, many nations hold floats of major currencies in the central banking system. Currency reserves should not be confused with foreign debt holdings. Although both represent claims on another country (a bond for repayment and a unit of currency for a given trade value), Reserves are primarily kept for trade purposes rather than investment.
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