Reserve currency

About: A reserve currency is a large amount of currency held by central banks and major financial institutions to use for international transactions. A reserve currency has to serve as a medium of exchange, a store of value, and a unit of account. The main property of a reserve currency country is trust and the main upside is the “exorbitant privilege” of lower real interest rates. Currently, US dollar is the global reserve currency.

Detail: A reserve currency reduces exchange rate risk since there’s no need for a country to exchange its currency for the reserve currency to do trade. Reserve currency helps facilitate global transactions, including investments and international debt obligations. A large percentage of commodities are priced in the reserve currency, causing countries to hold this currency to pay for these goods.

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