What Is Reserve Currency?
What Is Reserve Currency?
Definition & Examples of Reserve Currency
By Justin Kuepper Updated October 30, 2021 Reviewed By Somer G. Anderson
A reserve currency is a currency held in large 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; it may be held 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 amounts.1
Before the mid-20th century, reserves were mostly gold and silver. Modern reserves are generally made up of strong foreign currencies. Many of them are specifically designated as reserve currencies by the International Monetary Fund (IMF). Reserve currencies can also be foreign currency securities, deposits, and loans.2
Starting in the mid-20th century, the U.S. dollar was set as the international reserve currency. Since then, strong economies in many countries have led to the rise of other international reserve currencies.3
There are multiple 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
U.S.: $517 billion Saudi Arabia: $515 billion
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