A reserve currency, or anchor currency, is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, and commodities such as oil, gold, etc.
This permits the issuing country to purchase the commodities at a marginally lower rate than other nations, which must exchange their currencies with each purchase and pay a transaction cost. For major currencies, this transaction cost is negligible with respect to the price of the commodity. It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others.
Read more about Reserve Currency: History, Global Currency Reserves, Theory, Call For New Major Reserve Currency
Famous quotes containing the words reserve and/or currency:
“Common experience is the gold reserve which confers an exchange value on the currency which words are; without this reserve of shared experiences, all our pronouncements are cheques drawn on insufficient funds.”
—René Daumal (1908–1944)
“Both of us felt more anxiety about the South—about the colored people especially—than about anything else sinister in the result. My hope of a sound currency will somehow be realized; civil service reform will be delayed; but the great injury is in the South. There the Amendments will be nullified, disorder will continue, prosperity to both whites and colored people will be pushed off for years.”
—Rutherford Birchard Hayes (1822–1893)