What is Foreign Exchange Market

Foreign exchange is a number of foreign currencies to finance international trade transactions. A foreign exchange consists of foreign exchange, namely the currencies accepted by all countries in the world are US Dollar ($), Japanese Yen, Euro, Pound sterling (UK), France-Franc, Switzerland-Franc, Dollar-Canada, DM (Deutsche Mark) – Germany, gold, securities applicable to international payments.

This is under the supervision of the monetary authority, namely the Central Bank. Foreign exchange is the same as the function of money in general, but the foreign exchange is in international transactions or between countries as a means of payment between countries, exchange of goods and services, accumulate wealth, monetary reserves, and measure wealth.

The government and the private sector are required to have foreign exchange reserves for international trade in maintaining the monetary and macroeconomic stability of a country. Foreign exchange reserves are a monetary indicator of the strength or weakness of a country’s economy. The definition of foreign exchange reserves is the amount of foreign currency reserved by the Central Bank (Bank Indonesia) for financing purposes and foreign obligations, such as import financing and other financings to foreign parties.

Sources of Foreign Exchange

The level of foreign exchange in a country is influenced by the development of a country’s balance of payments. The sources of foreign exchange are as follows:

A. Export activities

A country with an open economic system, export activities are one of the country’s mainstays to earn foreign exchange. The more exports of goods or services, the greater the foreign exchange income for the country.

B. Service trade

Countries that move and rely on trade in services are countries that are not rich in natural resources. This is like what Singapore did by relying on trade services as the main source of foreign exchange.

C. Tourism activities

One source of foreign exchange is tourism services obtained from foreign and domestic tourist visits. The more tourists who visit the country, the more foreign exchange will flow into the country.

D. Foreign loans (foreign aid)

Foreign loans are one of the sources of foreign exchange for a country, especially countries in the world that or are developing. Countries that are usually very dependent on foreign aid as well as other sources.

E. Grants and gifts from abroad

Grants or gifts are a source of foreign exchange for a country that is not attractive. Grants or gifts sourced domestically or abroad.

F. Citizens working abroad

Another source of foreign exchange is funds that come from citizens who work abroad, for example, TKW or TKI. The worker plays a big role in getting a foreign exchange from a country with money transferred from the country where he works.

Foreign Exchange Function

Foreign exchange has a function that plays a role in the economy of a country, namely as follows:

1. Serves as a means of payment for imported goods and services
2. Serves as a means of payment of foreign debt installments, especially interest
3. Serves as a means of financing foreign relations, for example, the cost of art missions, official travel expenses, diplomatic corps fees and the provision of foreign aid.
4. Serves as a source of state revenue to finance development.

Purpose of Use of Foreign Exchange

In accordance with the foreign exchange function, the purpose of using a foreign exchange is as follows:

1. The goal is to pay for consumption goods that are still imported, such as cellphones and cloth
2. The goal is to pay for imported capital goods, such as machinery
3. The goal is to finance the delivery of arts and sports teams.
4. The goal is to finance the diplomatic corps abroad
5. The goal is to pay for services abroad, such as shipping services
6. The goal is to build various public facilities in the country
7. The goal is to finance youth and students to study abroad
8. The goal is to give donations to other countries experiencing calamities

Types of Foreign Exchange

1. General foreign exchange, namely foreign exchange earned from export activities, sales of services and capital interest.
2. Credit foreign exchange, which is foreign exchange obtained from foreign loan credit.
3. State Foreign Exchange is the foreign exchange owned by the government which is administered in foreign exchange funds.
4. Complementary foreign exchange is a foreign exchange that is owned by the private sector but its use is supervised and regulated by the government, namely a certain portion of the foreign exchange proceeds from the sale of services (in foreign currency) from transfers, and others applicable at that time can be owned by the producer.
5. Export foreign exchange is the foreign exchange owned by the private sector but its use is supervised and regulated by the government, namely a certain portion of the foreign exchange from the export of goods (visible goods) which according to the foreign exchange regulations in force at that time can be owned by the exporter concerned as an export incentive.

Benefits of Foreign Exchange Reserves

1. Buying goods or services from abroad (imports)
2. Paying the principal and interest on foreign debt
3. Financing of foreign trade activities
4. Finance representatives abroad (ambassadors, consulates, etc.)
5. Funding for athletes, cultural missions, comparative studies / official trips for state officials
6. And others

The Effect of Foreign Exchange Reserves on the Exchange Rate

Forex usually has a record of the official exchange rate of the country’s central bank. A currency that is often used as a means of payment and a unit of account in international economic and financial transactions is called a hard currency.

The currency that is rarely used as a means of payment and a unit of account due to its relatively unstable value is called soft currency. The amount of foreign exchange owned by the government and the private sector of a country is called foreign exchange reserves. A country’s foreign exchange reserves consist of official foreign exchange reserves (official forex reserves) and national foreign exchange reserves (country forex reserves).

The official foreign exchange reserves or net foreign exchange reserves are the amounts of foreign currency that actually belongs to BI obtained from the reduction of gross foreign assets with the Central Bank’s obligations in foreign currency, including the following:

1. Gross liability, namely obligations in foreign currency with a maturity of up to a year (including the use of IMF funds).

2. Net-forward position, namely the obligations of Bank Indonesia in foreign currency to residents (residents) and non-residents (non-residents) in the form of forward transactions (transactions when delivery of goods and securities on a certain date at a fixed price).

3. The existing banking division at BI is in compliance with the provisions of the minimum statutory reserve requirement (GWM) for foreign currency.

National foreign exchange reserves are the sum of foreign exchange reserves owned by the government and foreign exchange reserves held by foreign exchange banks.