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Foreign exchange reserves

The foreign currency assets a central bank holds, used to defend a peg, intervene, service external debt and reassure lenders; published monthly and watched closely.

Reserves are mostly short-dated government securities and deposits in major currencies, plus gold and IMF positions. They are the ammunition behind central-bank-intervention and the reason a currency-peg is credible or not.

Monthly reserve data is read for two things: whether the authorities have been selling, which points to intervention, and how much cover remains. Analysts compare reserves with months of imports and with short-term external debt falling due within a year, since that is what a sudden stop would demand.

Very large holders such as China and Japan run reserves in the trillions and low hundreds of billions of dollars respectively, which changes the calculation entirely: their constraint is political and economic, not arithmetic.

Example: reserves of $60bn against $45bn of short-term external debt and $5bn of monthly imports gives twelve months of import cover and a coverage ratio of 1.33, which markets would treat as adequate but not comfortable.

Related: central-bank-intervention, currency-peg, balance-of-payments, capital-account

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