National governments are major players in the forex market. However, their purpose for continual active trading is not to shift the values of major currencies. Instead, they use trading investments as a means to finance government operations, transfer payments and manage currency reserves.
Currency reserve management is a term summarizing how governments develop and invest their foreign currency reserves. A nation accumulates foreign currency when the money they earn on their exports is greater than the money they spend on imports.
The American Dollar has typically been the primary currency for the international reserve holdings of most countries. In 2010, the International Monetary Fund showed the American Dollar accounted for about 62 percent of global currency reserve holdings, with the Euro coming in second at 27 percent, and the British Pound and Japanese Yen in third with 3 to 4 percent.
However, due to the massive deficit held by the United States in recent years, it has borrowed money from the countries with trade surpluses, primarily those in Asia. These countries then buy IOUs in the form of U.S. Treasury debt securities.
As a result, the American Dollar has become less popular as the major currency reserve for many national governments while the Euro, the Pound and the Yen have benefited the most from its decline.
Investors must be aware of how currency reserve management are handled. They have and will continue to play a major role in the currency market in the future.