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What is reserve currency?
Written by: PaxForex analytics dept - Monday, 26 January 2015 0 comments
Currency of the state, which is used by the central banks of other countries to create and store cash reserves, as well as for operations on international settlements and investments of foreign countries is called reserve currency.
Reserve currency must meet certain requirements:
- A convertibility of national currencies;
- A stable exchange rate;
- A favorable legal regime in international transactions.
Reserve currency gives certain advantages to the state whose national currency it is: balance of payments deficit can be covered by strengthening of national currency’s position in the global market.
Reserve currency has its own history and it varied in different periods of time. Initially, the British pound served as a reserve currency, it had an important function in the framework of international payments. Over time, the US dollar became a leader currency for international payments.
After the introduction of exchange standard based on gold and two currencies (the US dollar and the UK pound sterling), the dollar became the only currency directly linked to gold.
Conference free currency fluctuations were eliminated and the German mark, Swiss franc, Japanese yen also became reserve currencies.
XXI century has a tendency to transform the dollar into the reserve currency of the world. To date, the second-largest currency is the euro, which gradually increases its volume in central banks of many countries. However, the ongoing economic crisis and the associated weakening of the euro suggests that the euro is rapidly losing its role.
UK pound lost its role as a reserve currency after the Second World War, the difficult economic situation in the country and strengthening the role of the US economy. The Japanese yen was seen as a reserve currency for decades, but at the moment a degree of use of the currency is low.
The stability of the Swiss franc makes it attractive for usage as a reserve currency, but until now its share in foreign banks is not so big.
In recent years, many states have shown interest in the introduction of the national currency as a reserve. Such speculation has been made about the Russian ruble, Chinese Yuan etc. However, currently the USD and EUR occupy the dominant positions in world’s economy as well as in national banks’ reserves.