Foreign currency reserves - why we hold them influences how we fund them

Release date
01/09/2012
Reference
Vol. 75. No. 3. September 2012
Authors
Anella Munro; Michael Reddell
This article reviews New Zealand’s approach to funding foreign currency reserves: a mix of holding foreign currency assets funded by outright purchases of foreign exchange, borrowing foreign currency long term to fund foreign currency assets, and swapping local currency assets for foreign currency assets for a long term. The use of borrowed and hedged reserves is unusual, but not unique, among floating exchange rate countries with liberalised financial markets. We consider the reasons for holding reserves, and the connection between these reasons and the costs and benefits of each of the funding options that New Zealand has chosen.