Reserves Definition. What are Reserves? Reserves refer to foreign exchange, gold, Special Drawing Rights, and IMF reserve positions, held by Central Banks and monetary authorities, which can be used to facilitate monetary policy, repay obligations, and conduct international trade. In the forex world, governments typically hold foreign currencies in reserve for this purpose. These Reserve Currencies are perceived to be stable and reliable, such that Central Banks are willing to hold them in mass quantities. The U.S. Dollar is currently the world’s foremost reserve currency, comprising approximately 62% of all reserves. The Euro is second at 27% with the Pound Sterling, Yen, Swiss Franc and others making up the balance. Governments tend to hold reserves in these currencies to facilitate international trade, purchase commodities or borrow at favorable rates. Commodities such as oil and gold are typically priced in one of these currencies. There is an international movement, led by large international trading countries like China, Russia, and the Arab states, to form an independent new currency to replace the Dollar as the reserve currency. China has suggested using Special Drawing Rights, calculated daily from a basket of the U.S. Dollar, Euro, Japanese Yen and British Pound, that are currently used by the International Monetary Fund for international payments.
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