The last time had dinner with some friends talking about what factors decide the exchange rates of currencies. Here popularize some economics knowledge, only because I need to practice english writing for the coming qualification test... :P
"International Economics: Theory & Policy seven edition", by Paul Krugman (latest economics nobel laureate) and M Obstfeld. Page 453.
"How the Central Bank Fixes the Exchange Rate"
To hold the exchange rate constant, a central bank must always be willing to trade currencies at the fixed exchange rate with the private actors in the foreign exchange market.
So, that's why people keep saying that a large amount of foreign exchange reserve could ensure a stable exchange rate. Assuming some country's central bank run out of US Dollars. then anyone who holds its currency wants to trade for US Dollars, but can not trade. This leads its currency less attractive, and the result is the value of the currency plunges. That's why country always needs a large number of foreign reserves to hold its currency.
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