What is Reserve Currency? Forex Market

The reserve currency provides some benefits to the state national currency: the shortfall in the balance of payments can be compensated by improving the strength of the national currency in the world market.

The reserve currency has a history of its own and has changed over different periods of time. The British pound originally acted as a reserve currency and had an important role in foreign payments. The US dollar has become a leading currency for foreign payments over time.

The dollar became the only currency explicitly connected to gold since the adoption of the exchange rate based on gold and two currencies (the US dollar and the UK sterling pound).

Free currency fluctuations were eliminated after the Jamaica Conference and the German mark, Swiss franc and Japanese yen became reserve currencies as well.

The 21st century has a propensity to turn the dollar into the world’s reserve currency. The second-largest currency to date is the euro, gradually increasing its volume in many countries’ central banks. The ongoing economic crisis and the associated weakening of the euro, however, indicate that the euro is losing its position rapidly.

After the Second World War, the UK pound lost its position as a reserve currency, the country’s difficult economic condition, and the position of the US economy strengthened. For decades, the Japanese yen has been used as a reserve currency, but the currency is currently low.

The Swiss franc’s stability makes it desirable for use as a reserve currency, but its share in foreign banks is still not so high.

Many states have shown interest in adopting the national currency as a reserve in recent years. There has been much speculation about the Russian ruble, the Chinese Yuan, etc. Currently, however, the USD and EUR hold dominant positions in both the global economy and the reserves of national banks.

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