Central banks, Global Economy, and Foreign Security Holdings

Central banks may work to influence both interest rate and FX exchange rate policies. They often have a good deal of latitude and resources at their command to do so. Thus, they often command considerable influence and resources to dictate money supply policies; establish bank reserve requirements; set the rate paid on reserve deposits; and, to operate directly in the open marketplace by buying or selling securities as well as currencies.

But along with their mandates and resources, they also are increasingly exposed to market risks. Notably, risks associated with exposure to foreign security holdings. To the extent that the United States has run a very large current account deficit for many years, other nations have accumulated large U.S. dollar denominated reserves.