Why Central Banks Hold Foreign Exchange Reserves

Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates · Aug 4, 2026 · 10m · transcript

Central banks hold trillions in foreign exchange reserves, but why? In this episode, Lucas and Luna unpack the real reasons behind these stockpiles — from smoothing currency swings to ensuring import stability — using concrete examples like China's massive dollar holdings and Switzerland's franc defense. They walk through the trade-offs of holding reserves, the cost of diversification into gold, and why the 'exorbitant privilege' of the dollar keeps the system dollar-heavy. If you've ever wondered what actually sits behind the phrase 'central bank reserves,&#x27…