A:

A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign exchange reserves. Reserve currencies usually also become the international pricing currencies for products traded on the global market such as oil, gold and silver. Currently, the U.S. dollar is the primary reserve currency used by other countries.

Manipulating reserve levels can enable a country's central bank to intervene against volatile fluctuations in currency by affecting the exchange rate and increasing the demand for and value of the country's currency. Reserves act as a shock absorber against factors that can negatively affect a country's exchange rates and, therefore, the central bank uses reserves to help maintain a steady rate.

The most popular currency held in reserves is the U.S. dollar. In the U.S., almost all banks are part of the Federal Reserve system and it is required that a certain percentage of their assets be deposited with the regional Federal Reserve Bank. The reserve requirements are established by the Board of Governors and by varying the requirements, the Fed is able to influence the money supply. Reserves also keep the banks secure by reducing the risk that they will default by ensuring that they maintain a minimum amount of physical funds in their reserves. This increases investor confidence and stabilizes the economy.

Basically, the Board of Governors of a central bank meets and decides on the reserve requirements as a part of monetary policy. The amount that a bank is required to hold in reserve fluctuates depending on the state of the economy and what the Board of Governors determines as the optimal level.


For further reading, see Formulating Monetary Policy, Get To Know The Major Central Banks and What Are Central Banks?


RELATED FAQS
  1. How are bank reserve requirements determined and how does this affect shareholders?

    Learn how bank reserve requirements are determined and how bank reserves affect shareholders through improved bank stability ... Read Answer >>
  2. What do banks do to control the bank reserve?

    Understand what the Federal Reserve does in order to expand or contract the economy. Learn what depository institutions can ... Read Answer >>
  3. Why would the Federal Reserve change the reserve ratio?

    Understand the Federal Reserve's monetary policy and the tools it uses to change that monetary policy. Learn about the reserve ... Read Answer >>
  4. Which nations' economies have reserve ratios?

    Learn more about the inconsistent imposition of depository banking reserve ratios, and why the United States stands alone ... Read Answer >>
  5. Why do commercial banks borrow from the Federal Reserve?

    Learn how commercial banks borrow from the Federal Reserve to meet minimum reserve requirements, and discover the pros and ... Read Answer >>
Related Articles
  1. Insights

    A Primer On Reserve Currencies

    For nearly a century, the U.S. dollar has served as the world's premier reserve currency, but the future is uncertain.
  2. Investing

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  3. Investing

    Will the Yuan Become an International Reserve Currency?

    Although still a matter of when, China is likely to reach a significant milestone when the International Monetary Fund decides to include the Chinese yuan in its special drawing rights basket ...
  4. Trading

    How The Triffin Dilemma Affects Currencies

    Countries that issue reserve currencies are faced with a dilemma: keep other countries happy or achieve domestic monetary policy goals.
  5. Trading

    Canada And Australia Dollars To Be Reserve Currencies

    The IMF upgrading the Canadian and Australian dollars to "official" reserve currency status is a recognition of reality.
  6. Insights

    The Currency Board: Understanding The Government's Bank

    Currency board, central bank - what's the difference? Find out more about this little-known monetary authority.
  7. Investing

    Get To Know The Major Central Banks

    The policies of these banks affect the currency market like nothing else. See what makes them tick.
  8. Trading

    What Causes A Currency Crisis?

    Find out what can cause a currency to collapse and what central banks can do to help.
RELATED TERMS
  1. Reserve Ratio

    The portion (expressed as a percent) of depositors' balances ...
  2. Reservable Deposit

    A bank deposit subject to reserve requirements. Reserve requirements ...
  3. Free Reserves

    A measurement of a bank's reserves that is equal to the difference ...
  4. Foreign Exchange Reserves

    Foreign exchange reserves are reserve assets held by a central ...
  5. Reserve Requirements

    Requirements regarding the amount of funds that banks must hold ...
  6. International Reserves

    Any kind of reserve funds that can be passed between the central ...
Hot Definitions
  1. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  2. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
  3. Tax Refund

    A tax refund is a refund on taxes paid to an individual or household when the actual tax liability is less than the amount ...
  4. Gross Domestic Product - GDP

    The monetary value of all the finished goods and services produced within a country's borders in a specific time period, ...
  5. Inflation

    The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of ...
  6. Merchandising

    Merchandising is any act of promoting goods or services for retail sale, including marketing strategies, display design and ...
Trading Center