What Is Reserve Currency?
Definition & Examples of Reserve Currency
Justin Kuepper Updated July 24, 2020
A reserve currency is a currency held in significant quantities by governments and institutions. These currencies are used as a means of international payment and to support the value of national currencies.
Learn what makes a reserve currency and how it can impact global trade.
What Is Reserve Currency?
A reserve currency is a foreign currency or precious metal that is held in large quantities by a country's government, central bank, or other monetary authority. It is used for participating in the global economy, such as through international transactions or investments.
In general, a reserve currency is one that:
Has the depth and liquidity to allow for reliable and efficient international transactions
Can be freely and easily exchanged for other currencies
Is held by many monetary authorities and institutions, in significant amounts1
Before the mid-twentieth century, reserves were mostly gold and silver. Modern reserves are generally made up of strong foreign currencies, many of them specifically designated as reserve currencies by the International Monetary Fund. Reserve currencies can also be foreign currency securities, deposits, and loans.2
Starting in the mid-twentieth century, the U.S. dollar was designated the international reserve currency. Since then, however, strong economies in many countries have led to the rise of other international reserve currencies.3
There are several key factors that make a currency useful as a reserve currency. These include:
The size of the economy in the country where that currency comes from
How important that economy is internationally
How open its financial markets are
The currency's convertibility
Whether it is used as a regional or international currency peg
Domestic macroeconomic policies2
The countries with the most foreign reserve currency in 2019 were:
China: $3.2 trillion
Japan: $1.3 trillion
Switzerland: $855 billion
Russian Federation: $555 billion
United States: $517 billion
Saudi Arabia: $515 billion
These reserves (which are rounded up to the nearest billion) include gold, U.S. dollars, and other reserve currencies.4
To continue reading, please go to the original article here:
https://www.thebalance.com/what-is-a-reserve-currency-1978926
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