Purpose
In a flexible exchange rate system, official international reserve assets allow a central bank to purchase the domestic currency, which is considered a liability for the central bank (since it prints the money or fiat currency as IOUs). This action can stabilize the value of the domestic currency.
Central banks throughout the world have sometimes cooperated in buying and selling official international reserves to attempt to influence exchange rates. This coordinated strategy was used to replace pound sterling with US dollar as the world reference currency during the 20th century. The lack of such international cooperation is also a big concern for the replacement of US Dollar in this role of reference currency in foreign exchange reserves.
Read more about this topic: Foreign-exchange Reserves
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