Reserve currency
Also called: Global reserve currency · Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
A reserve currency is a currency that central banks hold in large amounts as part of their foreign exchange reserves. It is also widely used to price and settle international trade and finance. The US dollar is the main reserve currency, followed by the euro, yen, pound and yuan. Being the reserve currency gives the US an "exorbitant privilege". It can borrow cheaply in its own currency, because the world needs dollars.
Example
Most of RBI's foreign currency assets are held in dollar assets such as US Treasury securities. India's oil import bills and much of its external debt are also in dollars. That is why a strong dollar puts pressure on the rupee.
Don't confuse with
- Special Drawing Rights (SDR): an international reserve asset created by the IMF in 1969. It is a claim on freely usable currencies, not a currency itself.
- Dollarisation: a country using the US dollar alongside or in place of its own currency at home.
Related concepts
- International monetary system
- Gold standard
- Bretton Woods system
- Triffin dilemma
- IMF quota
- Reserve tranche position
- Special Drawing Rights
- Washington Consensus
- Structural adjustment programme