Reserve currency

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    Currencyreserve currency (also known as an “anchor currency”) is a foreign currency held in large quantities by central banks and financial institutions (such as the International Monetary Fund (IMF) and World Bank) as an acceptable means of international payment.

    How are reserve currencies used?

    Reserve currencies enable a country to cover international debt and other obligations whilst reducing the risk associated with exchange rate fluctuations. These fluctuations could cause unpredictable and costly changes in the level of international payments.

    Reserve currencies can also be used to support a nation’s own currency. For example, the Bank of England could use its foreign reserves to repurchase the British pound.

    What is the most widely used reserve currency?

    At present, the primary world reserve currency is the US dollar and many commodities, such as gold and silver, are priced accordingly in US dollars. This means that other nations closely monitor US monetary policy to assess any impact on inflation, because it would affect the value of their reserves.

    What does the future look like for reserve currencies?

    The US dollar may not always play such a central role and there is currently much debate around reserve currencies. The euro has been increasing in popularity and the Chinese yuan has also been touted as a potentially key reserve currency for the future.

    To find out more about the impact of external economics on currency, go to our module: