Question

give one article of how foreign exchange reserves are affected by a country that mainly exports crude oil or another commodity

Answer 1

How Foreign Exchange Reserves Work The country's exporters deposit foreign currency into their local banks. They transfer the currency to the central bank. Exporters are paid by their trading partners in U.S. dollars, euros, or other currencies. The exporters exchange them for the local currency. They use it to pay their workers and local suppliers. The banks prefer to use the cash to buy sovereign debt because it pays a small interest rate. The most popular are Treasury bills because most foreign trade is done in the U.S. dollar due to its status as the world's global currency.

Purpose There are seven ways central banks use foreign exchange reserves. First, countries use their foreign exchange reserves to keep the value of their currencies at a fixed rate. A good example is China, which pegs the value of its currency, the yuan, to the dollar. When China stockpiles dollars, it raises the dollar value compared to that of the yuan. That makes Chinese exports cheaper than American-made goods, increasing sales.

Similarly, foreign investors will get spooked if a country has a war, military coup, or other blow to confidence. They withdraw their deposits from the country's banks, creating a severe shortage in foreign currency. This pushes down the value of the local currency since fewer people want it. That makes imports more expensive, creating inflation.

By Country The countries with the largest trade surpluses are the ones with the greatest foreign reserves. That's because they wind up stockpiling dollars because they export more than they import. They receive dollars in payment.

Professional forex traders have long known that trading currencies requires looking beyond the world of FX. Currencies are moved by many factors, including supply and demand, politics, interest rates, speculation, and economic growth. More specifically, since economic growth and exports are directly related to a country's domestic industry, it is natural for some currencies to be heavily correlated with commodity prices.