Reserve Assets

AAA

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.

INVESTOPEDIA EXPLAINS '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. Division Of Reserve Bank Operations ...

    An entity under the Federal Reserve System that manages certain ...
  2. Federal Reserve Communications ...

    A communication network established in 1981 in an effort to update ...
  3. International Reserves

    Any kind of reserve funds that can be passed between the central ...
  4. Reserve Requirements

    Requirements regarding the amount of funds that banks must hold ...
  5. Equalization Reserve

    A long-term reserve that an insurance company keeps for the purpose ...
  6. Central Bank

    The entity responsible for overseeing the monetary system for ...
RELATED FAQS
  1. What is the correlation between inflation and interest rate risk?

    There is a positive correlation between inflation and interest rate risk. Inflation basically occurs when there is too much ... Read Full Answer >>
  2. How is a block chain network useful for trading goods and assets in virtual currencies?

    Perhaps the most famous quote associated with blockchain technology came from an anonymous virtual currency user, who described ... Read Full Answer >>
  3. Who are some real life examples of "doves" in the finance world?

    Real-life examples of "doves" in the finance world include Janet Yellen, Paul Krugman, Ben Bernanke, Bill Dudley, Narayana ... Read Full Answer >>
  4. What is the structure of the U.S. Federal Reserve Bank?

    The structure of the U.S. Federal Reserve Bank is centralized and hierarchical, consisting of several independent but interrelated ... Read Full Answer >>
  5. Who determines the reserve ratio?

    The Federal Reserve of the United States of America is the regulatory entity that determines the reserve ratio, and therefore ... Read Full Answer >>
  6. How must banks use the deposit multiplier when calculating their reserves?

    The maximum amount of checkable deposits a bank creates through loaning money cannot exceed the amount of the bank's reserves ... Read Full Answer >>
Related Articles
  1. Economics

    7 Misconceptions About The Federal Reserve

    There are many fallacies about the Fed. The following misconceptions are among the most popular.
  2. Bonds & Fixed Income

    The Treasury And The Federal Reserve

    Find out how these two agencies create policies to stimulate the economy in tough economic times.
  3. 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.
  4. Personal Finance

    How The Federal Reserve Manages Money Supply

    Find out how the Fed manages bank reserves and this contributes to a stable economy.
  5. Forex Education

    Taking Advantage Of Central Bank Interventions

    These interventions provide great opportunities for investors and traders to seize entries into longer-term trends.
  6. Personal Finance

    How The Federal Reserve Was Formed

    Find out how this institution has stabilized the U.S. economy during economic downturn.
  7. Economics

    When The Federal Reserve Intervenes (And Why)

    The Federal Reserve doesn't interfere with the economy every time it flounders. Find out more here.
  8. Fundamental Analysis

    Understanding The Federal Reserve Balance Sheet

    We are all connected to the Fed's balance sheet, and the currency notes that we hold are its liabilities.
  9. 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.
  10. Retirement

    Money Market Mayhem: The Reserve Fund Meltdown

    This event serves as a stark reminder to investors about understanding their portfolios.

You May Also Like

Hot Definitions
  1. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  2. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  3. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  4. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  5. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  6. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!