Reserve Currency

Most central banks hold their currency reserves in a basket of so-called reserve currencies that are used for foreign exchange (or FX) management and international transactions. Reserve currencies must meet certain requirements: they must be liquid and widely traded, freely convertible with no currency controls, and be currencies of advanced economies with monetary stability. The US dollar is by far the world’s predominant reserve currency, followed by the euro, and a long way behind, the yen and pounds sterling, then the Canadian dollar, Australian dollar, and Swiss franc. The renminbi (or RMB) is gaining ground as a reserve currency even though it does not meet all of the requirements above. The RMB is included, for example, in the IMF’s Special Drawing Right (SDR), an international reserve asset and unit of account created to supplement member countries’ official reserves. The value of the SDR is based on a basket of US dollar, euro, RMB, yen and pounds sterling