Reserve Currency

Central banks hold reserves of foreign currencies to support their own currency, pay for imports, service foreign debt and provide stability in a crisis. They prefer currencies that are stable, widely accepted and backed by deep, liquid financial markets.

The US dollar is the dominant reserve currency, accounting for more than half of global foreign exchange reserves. The euro is the second most important. Others include the Japanese yen, the British pound, the Chinese renminbi, and the Canadian and Australian dollars.

For example, many commodities, including oil, are priced in US dollars, and much international trade and borrowing takes place in dollars, which increases global demand for dollar reserves.

Issuing a major reserve currency brings advantages, such as lower borrowing costs and the ability to borrow in one's own currency. Economists sometimes describe this as an exorbitant privilege. It also brings responsibilities and risks, since domestic policy decisions affect the global economy. The dominance of the dollar is a recurring topic of debate.