Reserve Currency

A Reserve Currency is a currency held by governments as component of their foreign exchange reserves. The foreign exchange reserves of most countries consist of more than one currency, but usually this number is limited to currency used heavily in international trade. For example both oil and gold are priced in US dollars internationally, and most countries in the world hold US dollars in their foreign reserves. The top three reserve currencies are the US dollar, the Euro and the British Pound. The reserve currencies are used in international financial transactions and trade. The reserve currencies are sometimes used in currency market interventions to protect the value of national currencies.

US Dollar

The US Dollar is the de-facto the world's reserve currency. The fact that the US dollar is the top reserve currency, allows the US to run huge trade deficit, because there is a significant demand for US dollars. However the US dollar status as a reserve currency has been eroding in the last decade due to the fact that it loses its value rapidly compared to other currencies, commodities and gold. Around two thirds of the world's foreign reserves are held in US dollars.


Even though the Euro was created just a few years ago, it already has claimed spot number two as a world reserve currency. Before the Euro creation the German Mark was number two reserve currency in the world. Since the Euro was created there is a slow shift from US dollars to Euros in the foreign reserves held around the world. If this trend continues the Euro can become number one reserve currency. Around 25% of the world's foreign reserves are held in Euros.

Pound Sterling

The UK pound sterling has been top reserve currency in 18th and 19th centuries. However during the 20th century the British pound lost its top reserve currency status. The British pound however managed to reclaim spot # 3 as a reserve currency in 2006, pushing the Japanese Yen to 4th place. Less than 5% of world's foreign reserves are held in pounds.

Japanese Yen

The Japanese yen was the third most used reserve currency for a good part of the 20th century and the beginning of 21st, however it lost the third place to the pound sterling in 2006. Less than 3% of the world's foreign reserves consist of Yen.