Research on Brazilian foreign exchange reserves has historically focused on their optimal volume, but little has been produced about the currency composition of these reserves. The literature on this subject seems to converge on some fundamental aspects that would help to understand the arrangement of currencies of international reserves, that is, commercial, financial and exchange aspects. Regarding the commercial aspect, a recent literature, known as the Dominant Currency Price (DCP), brought strong evidence on the role of import revenues to explain the composition of reserves. Thus, we sought to understand whether these determinants are significant to explain the composition of Brazilian foreign exchange reserves during the period 2002-2020, when there was a strong accumulation. The results provide evidence that the revenue from imports, the external debt and the volatility of exchange rates are significant to explain the composition of the currency portfolio held by the Central Bank of Brazil. Then, a mean-variance portfolio choice model proposed by Ferreira et al. (2019) was used to test the optimal allocation of currencies based on a benchmark portfolio with weights related to commercial and financial obligations (invoicing and debt foreign exchange) that would provide returns that offset the costs of maintaining Brazilian reserves.
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