Reserve Currency

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Reserve Currency


a currency accumulated by the central bank of a country for making international payments. Usually, a convertible currency is used as the reserve.

In the late 1960’s and early 1970’s the US dollar, the British pound sterling, and the West German mark were the most widely used reserve currencies, accounting for more than half the international payments turnover of the capitalist countries. The French franc, the Japanese yen, the Dutch guilder, and the Swiss franc are far less extensively used as reserve currencies.

The use of a currency as a reserve currency depends on the extent of a country’s participation in the international division of labor and on its role in international trade. As a rule, a reserve currency is either a “trade currency” that accounts for a significant volume of the turnover in international trade or a currency that is associated with a country characterized by high economic potential (that is, a country that supplies the world market with a broad range of high-quality goods). The position of a currency on the international loan capital market is very important. For example, although the Swiss franc is not a trade currency, it is used as a reserve currency because Swiss banks, which have a high international reputation, offer tremendous possibilities for quickly mobilizing considerable monetary assets. Moreover, deposits in Swiss banks are considered a reliable investment of capital.

The choice of a country’s currency as a reserve currency is also related to the technical feasibility of making international payments and, in particular, to the presence in the country of a well-developed network of banking institutions with an international reputation. Thus, despite the substantial decline of Great Britain’s role in the world market and despite the drop in the value of the pound sterling, British currency is still used as a reserve currency because Great Britain has a worldwide network of banks (seeFOREIGN-EXCHANGE RESERVES).


References in periodicals archive ?
The reference currency status could signal the RMB's passage to an international currency or that it can stabilize as an anchor currency.
If an individual has enough currency to buy a million of the world's highest valued currency unit or the world's highest anchor currency unit, then that person should be counted as a millionaire.
Their idea is to mobilize regional currencies into transactions, to make the yen as an anchor currency, and eventually to transform it into a single regional currency.
If these perceptions are true, then the emerging economies in the South Asian region such as India, Pakistan, Bangladesh, and Sri Lanka will have to make a choice for an anchor currency for their financial dealings and transactions.
In addition, it is interesting to compare whether fixed exchange rate countries--such as Estonia--have attained greater similarity with the anchor currency countries than floating exchange rate countries.
The deutsche mark was the anchor currency for the monetary union and even the big countries like France and Italy fixed their currencies to the deutsche mark and that became the focus, the pivot for the anchor.
In a multilateral peg, the distinction between the anchor currency and the pegging currency becomes blurred because the participating countries are obligated to take monetary policy measures to defend the exchange rate peg.
Nevertheless, because of the asymmetry in the way the rules worked, there proved to be a rigidity that caused the system to break, rather than bend, in the face of specific economic forces--namely, the debasement of what was intended to be the anchor currency, the U.
The development of the yen as an anchor currency for a truly Asian currency will require a break in the dollar-yen dependency relationship," he said.
The idea of using the CBS, which is supposed to peg the Rupiah to an anchor currency at a fixed rate, has been welcomed by businessmen, who think that this will allow for certainty about the exchange rate and, hence, enable them to make long-term plans.
dollar area, the euro area (the euro is already today an important anchor currency for many Eastern European and African economies), and the yuan area.
NEW DELHI: The ongoing economic crisis and the persistent deficits of the United States have increasingly called into question the dollar's role as the world's anchor currency.