Investing Glossary – Reserve Currency

The following is either adapted or copied from Wikipedia. Some small adjustments and additions may have been made by Investor in the Family staff. For more, see our Investing Glossary.

A reserve currency (or anchor currency) is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves, and that is commonly used in international transactions. Persons who live in a country that issues a reserve currency can purchase imports and borrow across borders more cheaply than persons in other nations because they need not exchange their currency to do so. According to economists such as Valéry Giscard d’Estaing, a former French Minister of Finance and president, a reserve currency gets certain benefits called the exorbitant privilege.

As of 2013 the United States dollar is the world’s reserve currency, and the world’s need for dollars has allowed the United States government as well as US Americans to borrow at lower costs, granting them an advantage in excess of $100 billion per year. However, by increasing the value of the dollar, its status as a reserve currency hurts U.S. exporters.

Various political leaders from Russia and China have called the world to move towards a super-sovereign reserve currency. Similar discussions have been had in Europe by the Board for Global Financial Stability.

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