What is Reserve Currency?

The reserve currency is the currency used by countries as a foreign exchange reserve. It must be a freely convertible currency and widely used internationally for pricing and payment settlement. Usually only the currencies of a few countries with strong international political and economic strength can become reserve currencies. Before the First World War, the British pound was generally used as the main reserve currency by capitalist countries. During the Second World War, the US dollar rose to become the main reserve currency and replaced the British pound as the main reserve currency after the Second World War. ^[1]

Reserve currency

according to

Gold acquired by the government or central bank;

A typical reserve currency serves several purposes: trading currency (used as working capital);

The conditions for a country's credit currency to become an international payment instrument and reserve currency are:

The country issuing this credit currency must have strong economic strength and occupy an important or dominant position in the international economic field. Only when a country occupies an important position in the world's commodity exports and capital exports,

In the early hours of April 10, 2014, Standard Chartered Bank stated in its report that central banks in at least 40 countries have placed bets on China's renminbi, and many more are preparing to take the same action. This trend is emerging in both emerging markets and developed countries. According to the report, these central banks are moving closer to other currencies, and "many central banks are adding RMB to their portfolios." ^[3]

A plan by the International Monetary Fund (IMF) considers including the Australian and Canadian dollars in reserve currencies, which may curb sharp fluctuations in the exchange rates of the two currencies and increase their Attractive. ^[4]

The enhancement of these two growth-themed currencies in central bank reserves may weaken the high degree of correlation with stock and commodity markets. It is because of this high degree of correlation that when the market's concerns about the global economic situation escalate, these two currencies will be sold off.

The IMF released the latest "Official Foreign Exchange Reserve Currency Composition" report last month, which showed that the central banks of some countries use the Australian and Canadian dollars as reserve currencies more and more frequently. The survey found that of the other 10 currencies held by central banks, only the Australian dollar and Canadian dollar were held by more than two countries.

In past reports published by the IMF, the Australian dollar and the Canadian dollar were included in the ranks of "other currencies". But now, the IMF plans to classify these two currencies with the other five major currencies. When these two currencies will be listed as reserve currencies has not yet been determined, but this is the first time the IMF has designated a new reserve currency since the introduction of the euro in 1999.

Many central banks in Asia, the Middle East, and Europe hold trillions of dollars in reserves. In recent months, they have gradually reduced their holdings of the US dollar and the Japanese yen and increased their holdings of the Australian and Canadian dollars.

Simon Derrick, head of foreign exchange research at Bank Of New York Mellon, said, "Because of problems in the United States and the crisis in the euro area, those central banks have been looking for trusted alternative currencies for their reserves. In the medium term, the Australian and Canadian dollars May behave like a safe-haven currency. "

Traditional safe-haven currencies have become the reserve currency favored by the central bank due to their strong liquidity, which is generally opposite to the stock market and other growth-themed assets or currencies.
However, the correlation between the Canadian dollar and the Australian dollar and the stock market is showing signs of weakening. The US stock market's S & P 500 index has fallen more than 2% in the current quarter, while the Australian dollar and the Canadian dollar have increased by 1% and less than 1% against the US dollar, respectively.

On March 19, 2012, Lagarde, President of the International Monetary Fund (IMF), believed that the world economy faces three major risks: the fragile fiscal and financial systems of advanced economies, high oil prices, and economic slowdown in emerging economies. Under the premise of the completion of the reform, there is no reason for the renminbi not to become a reserve currency and to obtain a position commensurate with the size of the Chinese economy.