What is a Reserve Currency?

Reserve Currency Definition. What is a Reserve Currency? A Reserve Currency is any currency that is deemed to be stable and reliable, such that Central Banks are willing to hold it 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 as part of their foreign exchange reserve balances in order 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.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.