The reserve currency is a generally recognized currency
The reserve currency is a generally recognized currency that the central banks of states use as investment assets. Such reserves are needed to ensure the currency balance, support the national currency and ensure international settlements.
The main reserve currency today is the US dollar. The second reserve currency in the world is now considered to be the euro, which provides settlements for almost all EU members. The fate of the euro in the basket of reserve currencies is constantly growing due to the fact that banks are actively diversifying reserves. There are even assumptions and prerequisites that in the future the euro can match the dollar and even take its place in the world.
The British pound, which once held the leadership after the Second World War, lost its leader status amid the weakening of Europe and is now the third reserve currency in the world. The Swiss franc is also quite stable, the demand for which had to be reduced due to the negative interest rate. The Chinese yuan is also increasing its popularity and share in the global economy, but it lacks the liberalization of the exchange rate for a full-fledged world currency. But the Japanese yen has significantly reduced its share of use in recent decades.
The main functions of the world reserve currencies
The main functions of the world reserve currencies are to ensure and simplify settlements on the world market. Reserve currencies are also used as a means for central banks to preserve value. The concept of "reserve currency" originated from these functions.
There was hardly a need for reserve currencies if world settlements took place in national currencies. But this is practically impossible, since importers cannot always get a sufficient amount of the currency of the exporting state, especially if it is small. To do this, at least an economic agent is needed who would be interested in exchanging the currencies of the exporter and importer. In international trade, the choice of the settlement currency is influenced by such factors as: the demand for the exporter's products; the role of the importer and its currency in international trade; the position of the exporter on the world market; the ability of the exporter to set the value in major world currencies.
The country that owns the reserve currency receives even greater benefits from the world currency. Due to this, the flexibility of their financial system increases, the amount of finance that is circulating in their economies, as well as in case of financial problems, it is always possible to use the emission method of financing, without special inflationary consequences.