Exchange Stabilization Fund - Explained
What is an Exchange Stabilization Fund?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is an Exchange Stabilization Fund (ESF)?
The Exchange Stabilization Fund (ESF) is a U.S. Department of Treasury crisis fund that holds U.S. dollars, other remote monetary forms, and special drawing rights (SDR) reserves. These assets enable the Treasury to intercede in the foreign exchange (Forex) markets to affect trade rates. Generally, it works in international markets the same way a national bank of a country does to control the conversion standard of their money.
How does an Exchange Stabilization Fund Work?
The ESF was created by the Gold Reserve Act of 1934. One of the essential features of Stabilization finance is that it works with the International Monetary Fund (IMF) through the Treasury's special drawing rights (SDR).
SDR is a form of international money that was created by the IMF. It is the weighted average of several convertible currencies. These assets might be added to existing outside monetary forms to affect the trade rates in the Forex.
The Treasury can convert SDR assets into dollars by trading them with the Federal Reserve, the national bank of the U.S. SDR can also be traded for gold and other global stores held by the Fed.
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