Foreign currency reserve

A foreign currency reserve is a holding of money in foreign currency. A foreign currency reserve can be used to conduct currency policy. A foreign currency reserve is used to defend a fixed exchange rate.

If Sweden has a fixed exchange rate tied to USD and it is a high demand pressure on USD because Sweden has higher inflation than USA, the central bank in Sweden can use foreign currency reserve to defend the Swedish currency. The Swedish central bank can take USD from the foreign exchange reserves and buy USD to try to maintain the fixed exchange rate.