Reserve Assets

Running a central bank is a complicated undertaking. We know...from the outside, it looks like its all parties and dating underwear models. But, in reality, it involves some complicated financial maneuvering.

Reserve assets represent one example. A central bank (like the Federal Reserve) has to hold financial assets denominated in foreign currencies. These are used to balance payments.

So the Fed, which is in charge of monetary policy for the U.S. dollar, will hold assets in other currencies...the euro, the pound, etc. These assets take the form of things like financial capital, or commodities, or just outright currency. These reserves are then used to keep the foreign exchange market from getting out of whack, or for financing trade inbalances that take place with that currency.