A reserve currency refers to foreign funds that financial institutions and central banks hold for the purposes of trade and currency intervention. Any currency can be considered a reserve currency, but the most commonly held reserve currencies are those of world’s top economies. The U.S. dollar is the most widely held reserve currency.
While there are many reserve currencies, such as the euro, the Swiss franc and so on, the U.S. dollar holds a special place among them. Gold, oil and other important commodities are quoted in U.S. dollars. By holding U.S. dollars, a country can mitigate some of the exchange rate risks that may otherwise arise in international trade.
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