| The Fed engages in FX trading? What?

The Fed engages in FX trading? What?

Zowzooma, the Angry Deity asked:


My book says this: “Had foreigners not wanted to use their dollars to buy investments in the United States, our government would have been forced to draw down its official reserves and use its holdings of foreign currencies to trade for al the dollars that foreigners held.”

I’m not doubting this is true, but there are two things I don’t understand:

1. Why does the Fed do this? Why doesn’t the Fed, when a foreigner comes to it with U.S. dollars, say, “Get lost! If you wanna get rid of them, you have to spend them on U.S. goods somehow!”?

2. Also, where did the Fed acquire foreign currency to begin with?

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