Reserve currency is a currency that other states massively use to create their reserves, conduct international settlements, as an investment asset, and for other purposes. The leader in terms of world reserves is the US dollar, which is also the main currency for Payday Depot and other financial organizations. For the 4th quarter of 2021, 58.81% of all world foreign exchange reserves are stored in it. The euro accounted for 20.6%, 5.57% is stored in Chinese yuan.
Explanation in simple terms
Simply put, this is the money that could become a universal means of payment and can be used almost everywhere.
The status of the reserve currency is not eternal. In the 5th century BC, the hardest and most popular currency was the Greek silver drachma, then it was replaced by the Roman gold areus, and then the gold Byzantine solidus took its place. That is, the currencies of the most influential and economically developed countries became the reserve ones.
By the beginning of the 20th century, the British pound sterling, the French franc, and the German mark served as the official reserve currency. After World War II and the start of the Bretton Woods system, most of the world’s money reserves began to be held in dollars. In recent years, the popularity of Chinese yuan is gaining popularity – the latest of the world’s currencies, which received the status of a reserve.
In theory, a central bank that issues a reserve or other currency should use the rate to protect money from loss of value, that is, from inflation. However, in the modern world, we see that the leading central banks are ready to sacrifice the fight against inflation in favor of economic growth.
Nuances and some special features
The main features of the reserve currency:
- Stability. The exchange rate of the reserve currency should not be affected by the slightest economic and political changes. It is important that investors and participants in transactions do not risk losing money due to fluctuations in its value.
- Free conversion. The reserve currency can be easily and without restrictions converted into other currencies.
- Active involvement in international trade. It is necessary that more than 30% of the money supply of the currency be used in the external market.
- The issuing country must have a free market and a large number of unregulated financial centers. It should also make a significant contribution to world trade.
As of 2022, the International Monetary Fund (IMF) recognizes the following monetary units as reserve currencies:
1. U.S. dollar;
2. Euro;
3. GBP;
4. CNY;
5. Japanese yen;
6. Australian dollar;
7. Canadian dollar;
8. Swiss frank.
There is also a special kind of reserve currency called Special Drawing Rights (SDR). The IMF created this artificial reserve asset in 1969. It is in the SDR that the fund issues international loans.
In recent years, BRICS has been considering the possibility of creating a new reserve currency based on the currencies of these countries. Elaboration of organizational issues is still at the initial stages. Such a currency will allow the BRICS countries to avoid currency and infrastructure risks.
