Here is the d'Arista explanation: ====================================================== Background: Official foreign exchange reserves function as a keystone of the global monetary system. They provide countries a mechanism to adjust the surpluses and deficits that constantly occur as individuals, firms and government entities make payments to one another in the course of international trade and investments. Today, the vast majority of those payments are made in four currencies – the dollar, euro, yen and pound sterling. Countries that do not issue these key currencies must acquire them in order for their citizens and companies to conduct most types of international transactions.
Foreign exchange reserves are created as these individuals and companies deposit payments denominated in dollars, euros, yen or pounds (typically in the form of a check drawn on a U.S., European, Japanese or British financial institution) in a local bank, which subsequently redeems the funds for local currency with the nation’s monetary authority. The central bank now owns a deposit with the foreign financial institution that issued the check – and the central bank usually invests that deposit in a reserve-currency country’s least risky debt securities in order to earn a reasonable return. For example, foreign central banks invest their dollar reserves primarily in U.S. Treasury bills and bonds. Reserves denominated in euros are invested in government securities issued by European Central Bank member countries such as Germany or France. Thus, reserve holdings constitute a source of credit for the country in which they are invested, not for the country that owns them. =====================================================
Start with which "local" bank. Who does the depositing? Her explanation is just too abstract for a tyro.
-- John K. Taber