Reserve currency

A reserve currency, also called an anchor currency, is a currency which is held in significant quantities by other governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, such as oil, gold, etc. This permits the issuing country to purchase the commodities at a significantly cheaper rate than other nations, which must exchange their currency with each purchase. It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others.

Related Topics:
Currency - Foreign exchange reserves - Oil - Gold

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The United States Dollar is the most important reserve currency in the world today, followed by the Euro, the Japanese Yen, the Pound Sterling and the Swiss Franc. For this reason, the US dollar is said to have "reserve currency status", making it possible for the United States to run significant trade deficits (financed by seigniorage) with limited economic impact (see currency crisis) as long as the major holders of reserve currencies do not issue public statements suggesting otherwise.

Related Topics:
United States Dollar - Euro - Yen - Pound Sterling - Swiss Franc - United States - Seigniorage - Currency crisis

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The Pound Sterling was the primary reserve currency of much of the world in the 18th and 19th centuries.

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The G8 also frequently issues public statements as to exchange rates, though with the exception of Japan, the member states are impotent in their ability to directly affect rates. In the past however, its predecessor bodies could directly manipulate rates to reverse large trade deficits (see Plaza Accord).

Related Topics:
G8 - Exchange rates - Japan - Trade deficit - Plaza Accord

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The top reserve currency is generally selected by the banking community for the depth and strength and stability of the economy in which it is used. Thus, as a currency becomes less stable, or its economy shrinks, bankers may abandon it for more stable or deeper economies. The Euro and the Renminbi are both candidates to become future reserve currencies as their areas of application enlarge (through EU expansion in the case of the euro, and domestic growth in China).

Related Topics:
Banking - Euro - Renminbi - EU - China

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