Reserve currency
A foreign currency held as part of official reserves.
A reserve currency is a foreign currency held by governments, central banks, or other monetary authorities as part of their foreign exchange reserves. It is used in international transactions, international investments, and all aspects of the global economy, often considered a hard currency or safe-haven currency. Reserve currencies have shifted over time with the evolution of the world's geopolitical order, from the Greek drachma and Roman denarius to the Spanish silver dollar and British pound sterling, with the United States dollar becoming dominant by the mid-20th century.
- Definition
- Foreign currency held by monetary authorities as part of foreign exchange reserves
- First true global reserve currency
- Spanish silver dollar (16th–19th centuries)
- Dominant reserve currency by mid-20th ce
- United States dollar
- Key historical examples
- Greek drachma, Roman denarius, Byzantine solidus, Islamic dinar, French franc, Dutch guilder, British pound sterling
- Current status
- US dollar remains dominant but share has declined since early 2000s
Lore & Background
Before World War II, foreign exchange such as the British pound made up less than 30% of global reserves, with gold being the primary exchange asset held by central banks. The Spanish silver dollar created the first true global reserve currency recognized in Europe, Asia, and the Americas from the 16th to the 19th centuries due to abundant silver supplies from Spanish America. The Dutch guilder, through the Bank of Amsterdam, was the first reserve currency stabilized using practices familiar to modern central banking.
Reader's Guide
Reserve currencies have come and gone with the evolution of the world's geopolitical order. The British pound sterling became dominant in the late 19th century as the United Kingdom was the primary exporter of manufactured goods and services, with over 60% of world trade invoiced in pounds. After World War II, the Bretton Woods system placed the United States dollar as the anchor, with the US government guaranteeing other central banks they could sell their dollar reserves at a fixed rate for gold. In 1971, President Richard Nixon suspended the convertibility of the USD to gold, creating a fully fiat global reserve currency system. The issuing country benefits from being able to purchase everyday goods at comparatively low prices and borrow on more favorable terms, including lower interest rates. In 2022, IMF researchers reported that while the dollar remains dominant, its share has declined over two decades as central banks diversified into nontraditional reserve currencies such as the Australian and Canadian dollars, the Swedish krona, and the South Korean won. Following the 2020 economic recession, the IMF opined about the emergence of 'A New Bretton Woods Moment' which could imply the need for a new global reserve currency system.
Did You Know?
- Before World War II, foreign exchange such as the British pound made up less than 30% of global reserves, with gold being the primary exchange asset.
- The Spanish silver dollar was the first true global reserve currency, recognized in Europe, Asia, and the Americas from the 16th to the 19th centuries.
- The Dutch, through the Bank of Amsterdam, were the first to establish a reserve currency stabilized using practices familiar to modern central banking.
- In 1971, President Richard Nixon suspended the convertibility of the USD to gold, creating a fully fiat global reserve currency system.
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