Saving is a good habit practiced not only by individuals but also corporations and even states. Having a rainy day fund instills security and provides stability to economies of all sizes. Also, these savings open up many other possibilities, such as investing in project funding, which additionally protects and eventually increases these funds.

Countries can pile up their savings in different assets. These can be precious metals like gold and silver (you can also invest in these, so check out Goldco for more details), oil and other commodities, and money. They use these assets to cover current payments, unexpected costs, future investments, and favorable opportunities.

As for cash savings, governments mainly rely on foreign money that’s stable and performs well, such as the dollar, which is currently the most represented currency in the world. Foreign exchange reserves (also known as forex) improve the country’s economy and help it withstand financial hardships when domestic money loses value.

How Foreign Currency Stash Help the Economy

Currency reserves benefit the economy of a country in many ways. As financial challenges are numerous, governments use these assets in different ways. For example, foreign money can retain the value of domestic currency at an optimal rate.

Also, states set prices for their export commodities in foreign money, usually dollars. That eases transactions, streamlines payments, and increases exports and imports with foreign partners.

The priority of using foreign money is the settlement of financial obligations, such as debt repayment or boosting imports. Then, governments can also rely on currency reserves to finance multiple projects rather than taking out costly loans. The optimal amount of these assets stabilizes the economy, making the country more attractive to foreign investors.

The credibility of a country is best measured based on foreign exchange reserves. Based on the current cash deposits, states can apply for more favorable loans and incentives. They seem to be less risky borrowers when their economies are stable.

Of course, there are certain restrictions on how countries should use currency reserves. For example, they shouldn’t use these assets to stimulate production or lend money to loss-making companies. In that case, foreign reserves would lose their purpose. Instead of being a means that stabilizes monetary policy, these assets would be a trigger of inflation.

How Much Currency Reserves Should a Country Have?

The stronger the country’s economy, the better its financial standings, and the more desirable its money is. World economic leaders with significant trade surpluses (such as the USA, China, etc.) generally have the largest reserves in cash and commodities.

The list of leaders in cash reserves is below:https://www.cfr.org/backgrounder/dollar-worlds-reserve-currency

Rich countries price their goods in their domestic currencies, which their partners hold as foreign exchange reserves. Both sides make all payments in the same currency, which makes the export and import costs lower.

There’s no strict rule to set the amount of cash reserves states should have because each economy is different. In general, there should be enough money to fully settle current expenses and short-term debts for three months. However, the current global economic situation and how countries react to crises should also be taken into account.

Cash reserves keep the liquidity of the domestic currency and the stability of the general economy. Countries should manage these assets well to avoid some extreme scenarios. If these reserves were low, the value of domestic currency would devalue, so the countries would have a problem importing goods.

This hardship would turn into mass shortages of food, fuel, and other goods. Moreover, it would trigger a rise in prices and inflation, pushing the state into a vicious cycle of indebtedness and collapse of the entire economy.

Factors Determining Reserve Currency

Not every money can be globally accepted. That status belongs to the currencies from strong and stable economies with a well-developed banking system and the possibility of being creditors. However, this still doesn’t mean that every rich country can issue global money. For now, that title belongs to the dollar, euro, yen, pound, and a few more banknotes represented in the global economy.

Countries issuing reserve currencies are at a great advantage compared to those who only hold them as money reserves. For example, they can trade with foreign partners in their own currency and thus are not subject to exchange. Also, higher demand can make issuer-states get more favorable loans and have a lower risk of repayment default.

Most of the world’s economies rely on the dollar, which isn’t the best solution. In periods when this banknote weakens, the price of USA commodities falls, which further affects cheaper exports. Thus, it becomes a competitor of other global export leaders and seriously shakes their economy. More options as currency reserves would waive these risks and reduce the monopoly.

Gold Reserves to Support Economies

Besides cash, countries can keep their reserves of gold. This precious metal is the forerunner of all modern currencies. Although it’s no longer used to pay for goods and services, it still has a large monetary impact. It is especially important for cash reserves.

It’s already known that gold is an excellent hedge against inflation, so countries buy and stash it. In the event of a domestic currency collapse, they would be able to support its value. Also, besides the already mentioned foreign currencies and stored commodities, countries invest in gold to diversify their portfolio and reduce the risk of loss.

States will use gold reserves depending on their needs and specific problems. Also, they will only buy gold when they think it’s a good time, not whenever the opportunity arises. If they were to purchase this precious metal excessively, it could devalue their currency. The more they buy, the more money they need. And if the state issues money without cover, it’s a sure path toward inflation and economic crisis.

Countries need enough funds to keep their currency stable, maintain a healthy economy, and remain liquid when the crisis hits. Foreign money helps them meet all domestic and international payments and diminish the consequences of any unforeseen external shock.