Reserve Requirements' Affect on Currency Trading

Reserve requirements are the amount of funds that banks must hold in reserve against the deposits that their clients make. Reserve requirements are saved in vaults or inside the closest Federal Reserve Bank.

When you're trading in foreign currency, you can consider the reserve requirements in order to establish the stability of the currency trading you have chosen. The higher this indicator is the safer you are.

The reserve requirement is decided upon by the Board of Governors, and is usually around 10%. These requirements include net transactions accounts, non personal time deposits and euro currency liabilities. The bank holds liabilities for each account that is opened, same as for currency trading accounts.

In conclusion, the reserve requirement is the amount of physical funds that banks are required to hold. This measure influences currency trading, because it sets the amount of money that banks can create from loans and investments. Reserve requirements do not hold as much influence on currency trading as Monetary Policy, but under the right circumstances they can have quite a large effect.

Example: If a bank holds $1 billion dollars in deposits for all its customers, most of that money is in circulation, and thus the bank doesn’t physically have the $1 billion. The reserve requirements make sure that banks keep a minimum amount of physical funds in their reserves in case they need it.

Posted by Paul Sander