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I am a bit confused about foreign exchange reserves.

I was reading this website (https://www.thebalance.com/foreign-exchange-reserves-3306258#targetText=Foreign%20exchange%20reserves%20are%20the,to%20manage%20their%20currencies'%20values) which talks about the export money, banks and the central bank.

So when exporters from a country (let's say from Australia) recieve money (let's say USD), does that money go to a local bank? If so, does the local bank convert the money into AUD, or does the money go to the central bank which converts it into AUD? And does the overseas money just sit there in the reserve bank? Sorry if this is confusing.

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There are two scenarios depending on the invoice currency of the trade.

If the trade is invoiced in USD, then the exporter receive USD from buyer, deposit this into the local bank. The local bank increase the amount in the exporter's bank account (in local currency), and put put this into central bank's reserve.

If the trade is invoiced in local currency, then the buyer has to exchange USD into local currency (similar process as above), then pay the exporter with local currency.

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  • $\begingroup$ Thanks @Art, is it meant to be "and put USD into the central bank's reserve" in place of "and put put this into central bank's reserve"? So are banks increasing the exporter's bank account in local currency and then putting the USD they received in the central bank? $\endgroup$ – Christopher U May 8 at 21:48

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