1.3.5. Increased confidence in the exchange rate policy and the government's monetary
large foreign exchange reserves to help increase people's confidence in the exchange rate policy and the government's currency. As discussed above, with the benefits brought, foreign exchange reserves to help stabilize the psychology of people in the country. The stability of the market as well as the psychology of the people believe that one of the conditions to the regulations and state policies are implemented effectively.
However, there also holds foreign exchange costs certain. Foreign exchange reserves usually have certain standards, while too large excess reserves, the country may be subject to the charges as the cost of foreign exchange reserves.
Firstly, costs incurred from exchange rate risk . The foreign exchange market in the world constantly changes, including the exchange rate. Exchange rate fluctuations for the worse, its value will diminish in relative terms makes reserves diminished value. Even, the rate changes can cause large losses, although the economy is no crisis.
Second, inflation. Effect of reducing the purchasing power of currency foreign exchange reserves due to inflation often also reduces the value of reserves. Therefore, governments must constantly increasing foreign exchange reserves to maintain the strength of their influence.
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