Reserve Assets

DEFINITION of 'Reserve Assets'

Currency, commodities or other financial capital held by monetary authorities, such as central banks, to finance trade imbalances, check the impact of foreign exchange fluctuations and address other issues under the purview of the central bank. Reserve assets should be liquid and under the monetary authority's control.

BREAKING DOWN 'Reserve Assets'

Before the Bretton Woods agreement ended in 1971, most central banks used gold as their reserve assets. Today, central banks may still hold gold in reserve, but this has been supplanted by reserves of foreign currencies. Currencies held by central banks have to be readily convertible, meaning that the currency should have high enough stable demand (and low controls) to allow the bank to use them.

Reserve assets can be used to fund currency manipulation activities by the central bank. In general, it is easier to push the value of a currency down than to prop it up, since propping the currency up involves selling off reserves to buy domestic assets. This can burn through reserves quickly. The central bank can put downward pressure on the currency by adding more money into the system and using that money to buy foreign assets. The downside to this strategy is the potential for increased inflation.

The U.S. dollar is widely considered to be the predominant reserve asset.

RELATED TERMS
  1. Foreign Exchange Reserves

    Foreign exchange reserves are reserve assets held by a central ...
  2. Reserve Currency

    A foreign currency held by central banks and other major financial ...
  3. Key Currency

    The currency used as a reference in an international transaction ...
  4. International Reserves

    Any kind of reserve funds that can be passed between the central ...
  5. Bank Reserve

    Bank reserves are the currency deposits which are not lent out ...
  6. Working Reserves

    Reserves held by banks above the required minimum level - or ...
Related Articles
  1. Economics

    What Does a Central Bank Do?

    A central bank oversees a nation’s monetary system.
  2. Economics

    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.
  3. Term

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
  4. Forex Education

    How Inflation-Fighting Techniques Affect The Currency Market

    Central banks use these strategies to calm inflation, but they can also provide longer-term clues for forex traders.
  5. Personal Finance

    What Are Central Banks?

    They print money, they control inflation, and much, much more. All you need to know about central banks is here.
  6. Forex Education

    Forex Tutorial: Forex History and Market Participants

    Given the global nature of the forex exchange market, it is important to first examine and learn some of the important historical events relating to currencies and currency exchange before entering ...
  7. Economics

    Can Bitcoin Kill Central Banks?

    Bitcoin is a peer-to-peer unofficial currency that operates without government or central bank oversight. Can Bitcoin kill off the need for central banks?
  8. Economics

    How Central Banks Control The Supply Of Money

    A look at the ways central banks pump or drain money from the economy to keep it healthy.
  9. Economics

    10 Countries With The Biggest Forex Reserves

    Without adequate reserves, a nation's economy can grind to a halt. Here are the 10 nations with the biggest forex reserves.
  10. Forex Education

    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.
RELATED FAQS
  1. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... 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. Who determines the reserve ratio?

    Understand what the Federal Reserve is and what it regulates in the U.S. economy. Learn about the reserve ratio and how the ... Read Answer >>
  4. 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 >>
  5. What happens if the Federal Reserve lowers the reserve ratio?

    Learn about the Federal Reserve's monetary policy and the tools it uses to control it. Understand what happens if the Federal ... Read Answer >>
  6. How do central bank decisions affect volatility?

    Using an aggregate, macroeconomic perspective, take a look at how some of the ways central bank decisions can impact market ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center