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Why has Australia reduced its foreign US currency reserve holdings since 2008? Explain your working and...

Why has Australia reduced its foreign US currency reserve holdings since 2008? Explain your working and answer in words.

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Answer #1

Australia has reduced their US currency holding reserves since state time, because it gets negatively affected due to exchange rate risk. If US currency holding is not hedged using the derivatives such as currency options, then it can create huge losses to the balance sheet of the Reserve Bank of Australia. Hence, it is good to diversify the exposure and opt for the more stable currencies for the holding as reserve. The second reason is the cost of holding US currency reserves. Since such type of reserves do not give any type of significant earnings, then it is good to invest in other securities that can give higher returns or yields. Hence, the Reserve bank of Australia has changed the approach since 2008 and opted for lower US currency holding as reserves.

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