Lesson #6

Regional Reserve Countries

Along with the global reserve currency – U.S. dollar, there are also other regional and international reserve countries.

In 1978, the nine members of the European Community ratified a plan for the creation of the European Monetary System managed by the European Fund of the Monetary Cooperation. By 1999 the countries, which constituted so-called Euro zone, have implemented the transition to the common European currency – the euro (see Figure 1.1 a-g). The euro bills are issued in denominations of 5, 10, 20, 50, 100, 200, and 500 euros. Coins are issued in denominations of 1 and 2 euros, and 50, 20, 10, 5, 2, and 1 cent.

The euro is a regional reserve currency for the euro zone countries and the Japanese yen is the reserve currency for the countries of Southeast Asia. The portfolio of reserve currencies may change depending on specific international conditions, to include the Swiss franc.

U.S. Federal Reserve System & Central banks of other G-7 Countries

All central banks, as well as the U.S. Federal Reserve System (FRS), affect the foreign exchange markets by changing discount rates and performing the monetary operations (as interventions and currency purchases).

Repurchase Agreements

In the world of foreign exchange operations the most significant are repurchase agreements. Repurchase agreements entail selling the same security back at the same price at a predetermined date in the future (usually within 15 days), and at a specific rate of interest. This arrangement amounts to a temporary injection of reserves into a countries banking system. The impact on the foreign exchange market is that the national currency should weaken. The repurchase agreements may be either customer “repos” or system “repos”.