Reserve currency

A reserve currency (or anchor currency) is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves. The reserve currency is commonly used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency. People who live in a country that issues a reserve currency can purchase imports and borrow across borders more cheaply than people in other nations because they do not need to exchange their currency to do so.

By the end of the 20th century, the United States dollar was considered the world's most dominant reserve currency.[1] The world's need for dollars has allowed the United States government as well as Americans to borrow at lower costs, granting them an advantage in excess of $100 billion per year.[2]

History

Reserve currencies come and go. International currencies in the past have included the Greek drachma, coined in the fifth century B.C., the Roman denari, the Byzantine solidus and Arab dinar of the middle-ages, the Venetian ducato and the Florentine florin of the Renaissance, the seventeenth century Dutch guilder and the French franc.

Gold Bars
Under the gold standard, the predominant global financial system from 1870 to 1914, paper notes were convertible into preset, fixed quantities of gold.

The Dutch guilder emerged as a de facto world currency in the 18th century due to unprecedented domination of trade by the Dutch East India Company.[3] However, the development of the modern concept of a reserve currency took place in the mid nineteenth century, with the introduction of national central banks and treasuries and an increasingly integrated global economy. By the 1860s, most industrialised countries had followed the lead of the United Kingdom and put their currency on to the gold standard. At that point the UK was the primary exporter of manufactured goods and services and over 60% of world trade was invoiced in pound sterling. British banks were also expanding overseas; London was the world centre for insurance and commodity markets and British capital was the leading source of foreign investment around the world; sterling soon became the standard currency used for international commercial transactions.[4]

WhiteandKeynes
John Maynard Keynes (right) and Harry Dexter White helped to draft the provisions of the post-war financial system. Here, they meet at the inaugural meeting of the International Monetary Fund, 1946.

Attempts were made in the interwar period to restore the gold standard. The British Gold Standard Act reintroduced the gold bullion standard in 1925,[5] followed by many other countries. This led to relative stability, followed by deflation, but because the onset of the Great Depression and other factors, global trade greatly declined and the gold standard fell. Speculative attacks on the pound forced Britain entirely off the gold standard in 1931.[6][7]

After World War II, the international financial system was governed by a formal agreement, the Bretton Woods System. Under this system the United States dollar was placed deliberately as the anchor of the system, with the US government guaranteeing other central banks that they could sell their US dollar reserves at a fixed rate for gold.[8]

In the late 1960s and early 1970s, the system suffered setbacks ostensibly due to problems pointed out by the Triffin dilemma—the conflict of economic interests that arises between short-term domestic objectives and long-term international objectives when a national currency also serves as a world reserve currency.

Global currency reserves

The IMF regularly publishes the aggregated Currency Composition of Foreign Exchange Reserves (COFER).[9] The reserves of the individual reporting countries and institutions are confidential.[10] Thus the following table is a limited view about the global currency reserves that only deals with allocated reserves:

2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1995 1990 1985 1980 1975 1970 1965
US dollar 61.69% 62.70% 65.34% 65.73% 65.14% 61.24% 61.47% 62.59% 62.14% 62.05% 63.77% 63.87% 65.04% 66.51% 65.51% 65.45% 66.50% 71.51% 71.13% 58.96% 47.14% 56.66% 57.88% 84.61% 84.85% 72.93%
Euro (until 1999 - ECU) 20.69% 20.15% 19.13% 19.14% 21.20% 24.20% 24.05% 24.40% 25.71% 27.66% 26.21% 26.14% 24.99% 23.89% 24.68% 25.03% 23.65% 19.18% 18.29% 8.53% 11.64% 14.00% 17.46%
Deutsche mark 15.75% 19.83% 13.74% 12.92% 6.62% 1.94% 0.17%
Japanese yen 5.20% 4.89% 3.95% 3.75% 3.54% 3.82% 4.09% 3.61% 3.66% 2.90% 3.47% 3.18% 3.46% 3.96% 4.28% 4.42% 4.94% 5.04% 6.06% 6.77% 9.40% 8.69% 3.93% 0.61%
Pound sterling 4.43% 4.54% 4.34% 4.71% 3.70% 3.98% 4.04% 3.83% 3.94% 4.25% 4.22% 4.82% 4.52% 3.75% 3.49% 2.86% 2.92% 2.70% 2.75% 2.11% 2.39% 2.03% 2.40% 3.42% 11.36% 25.76%
French franc 2.35% 2.71% 0.58% 0.97% 1.16% 0.73% 1.11%
Chinese renminbi 1.89%
Canadian dollar 1.84% 2.02% 1.94% 1.77% 1.75% 1.83% 1.42%
Australian dollar 1.62% 1.80% 1.69% 1.77% 1.59% 1.82% 1.46%
Swiss franc 0.15% 0.18% 0.16% 0.27% 0.24% 0.27% 0.21% 0.08% 0.13% 0.12% 0.14% 0.16% 0.17% 0.15% 0.17% 0.23% 0.41% 0.25% 0.27% 0.33% 0.84% 1.40% 2.25% 1.34% 0.61%
Dutch guilder 0.32% 1.15% 0.78% 0.89% 0.66% 0.08%
Other currencies 2.48% 2.50% 2.37% 2.86% 2.83% 2.84% 3.26% 5.49% 4.43% 3.04% 2.20% 1.83% 1.81% 1.74% 1.87% 2.01% 1.58% 1.31% 1.49% 4.87% 4.89% 2.13% 1.29% 1.58% 0.43% 0.03%
Source: World Currency Composition of Official Foreign Exchange Reserves International Monetary Fund

The percental composition of currencies of official foreign exchange reserves from 1995 to 2017.[11][12][13]

  Euro
  Other

Theory

Economists debate whether a single reserve currency will always dominate the global economy.[14] Many have recently argued that one currency will almost always dominate due to network externalities (sometimes called "the network effect"), especially in the field of invoicing trade and denominating foreign debt securities, meaning that there are strong incentives to conform to the choice that dominates the marketplace. The argument is that, in the absence of sufficiently large shocks, a currency that dominates the marketplace will not lose much ground to challengers.

However, some economists, such as Barry Eichengreen, argue that this is not as true when it comes to the denomination of official reserves because the network externalities are not strong. As long as the currency's market is sufficiently liquid, the benefits of reserve diversification are strong, as it insures against large capital losses. The implication is that the world may well soon begin to move away from a financial system dominated uniquely by the US dollar. In the first half of the 20th century multiple currencies did share the status as primary reserve currencies. Although the British Sterling was the largest currency, both the French franc and the German mark shared large portions of the market until the First World War, after which the mark was replaced by the dollar. Since the Second World War, the dollar has dominated official reserves, but this is likely a reflection of the unusual domination of the American economy during this period, as well as official discouragement of reserve status from the potential rivals, Germany and Japan.

The top reserve currency is generally selected by the banking community for the strength and stability of the economy in which it is used. Thus, as a currency becomes less stable, or its economy becomes less dominant, bankers may over time abandon it for a currency issued by a larger or more stable economy. This can take a relatively long time, as recognition is important in determining a reserve currency. For example, it took many years after the United States overtook the United Kingdom as the world's largest economy before the dollar overtook the pound sterling as the dominant global reserve currency.[15] In 1944, when the US dollar was chosen as the world reference currency at Bretton Woods, it was only the second currency in global reserves.[15]

The G8 also frequently issues public statements as to exchange rates. In the past due to the Plaza Accord, its predecessor bodies could directly manipulate rates to reverse large trade deficits.

Major reserve currencies

Global Reserve Currencies
Distribution of global reserve currencies

United States dollar

The United States dollar is the most widely held currency in the Allocated Reserves today. Throughout the last decade, an average of two thirds of the total Allocated foreign exchange reserves of countries have been in US dollars. For this reason, the US dollar is said to have "reserve-currency status", making it somewhat easier for the United States to run higher trade deficits with greatly postponed economic impact or even postponing a currency crisis. Central bank reserves held in dollar-denominated debt, however, are small compared to private holdings of such debt. In the event that non-United States holders of dollar-denominated assets decided to shift holdings to assets denominated in other currencies, there could be serious consequences for the US economy. Changes of this kind are rare, and typically change takes place gradually over time; the markets involved adjust accordingly.[15]

However, the dollar remains the favorite reserve currency because it has stability along with assets such as United States Treasury security that have both scale and liquidity.[16]

The US dollar's dominant position in global reserves is challenged occasionally, because of the growing share of unallocated reserves, and because of the doubt regarding dollar stability in the long term.[17][18][19][20][21] However, in the aftermath of the financial crisis, the dollar’s share in the world’s foreign-exchange trades rose slightly from 85% in 2010 to 87% in 2013.[22]

The dollar's role as the undisputed reserve currency of the world allows the United States to impose unilateral sanctions against actions performed between other countries, for example the American fine against BNP Paribas for violations of U.S. sanctions that were not laws of France or the other countries involved in the transactions.[23] In 2014 Beijing and Moscow signed a 150 billion yuan central bank liquidity swap line agreement to get around American sanctions on their behaviors.[24]

Euro

The euro is currently the second most commonly held reserve currency, comprising about a quarter of allocated holdings. After World War II and the rebuilding of the German economy, the German Deutsche Mark gained the status of the second most important reserve currency after the US dollar. When the euro was introduced on 1 January 1999, replacing the Mark, French franc and ten other European currencies, it inherited the status of a major reserve currency from the Mark. Since then, its contribution to official reserves has risen continually as banks seek to diversify their reserves, and trade in the eurozone continues to expand.[25]

Former U.S. Federal Reserve Chairman Alan Greenspan said in September 2007 that the euro could replace the U.S. dollar as the world's primary reserve currency. It was "absolutely conceivable that the euro will replace the US dollar as reserve currency, or will be traded as an equally important reserve currency."[26] Econometric analysis by Jeffrey Frankel and Menzie Chinn in 2006 suggested that the euro could replace the U.S. dollar as the major reserve currency by 2020 if either the remaining EU members, including the UK and Denmark, adopted the euro by 2020, or the recent depreciation trend of the dollar persisted into the future.[27][28] In recent years, the euro's share of the worldwide currency reserve basket has continued to increase—albeit at a slower rate than before the beginning of the worldwide credit crunch related recession and Eurozone crisis, which harmed the euro and slowed its adoption.[29] Since 2009, the reserve currency use of the euro has continued to drop, down to 23.9 percent in 2013.[30]

Other reserve currencies

Dutch guilder

The Dutch guilder was the de facto reserve currency in Europe in 17th and 18th centuries.[3][31]

Pound sterling

The United Kingdom's pound sterling was the primary reserve currency of much of the world in the 19th century and first half of the 20th century.[15] The emergence of the USA as an economic superpower, and the establishment of the U.S. Federal Reserve System in 1913,[32] and U.S. economic dominance from the second half of the 20th century onward, as well as economic weakness in the UK at various times during the second half of the 20th century, resulted in sterling losing its status as the world's most important reserve currency: in the 1950s 55% of global reserves were still held in sterling; but the share was 10% lower within 20 years.[15][33]

Since 2006, with the exception of 2012, sterling is the third most widely held reserve currency, having seen a resurgence in popularity in recent years, growing from about 2.5% to around 4% of all currency reserves.[34] Analysts said this resurgence was caused by carry-trade investors considering the pound as a stable high-yield proxy to the euro, and by the position of London in world financial affairs.[35]

Japanese yen

Japan's yen is part of the International Monetary Fund's (IMF) special drawing rights (SDR) valuation. The SDR currency value is determined daily by the IMF, based on the exchange rates of the currencies making up the basket, as quoted at noon at the London market. The valuation basket is reviewed and adjusted every five years.[36]

The SDR Values and yen conversion for government procurement are used by the Japan External Trade Organization for Japan's official procurement in international trade.[37]

Swiss franc

The Swiss franc, despite gaining ground among the world's foreign-currency reserves[38] and being often used in denominating foreign loans,[39] cannot be considered as a world reserve currency, since the share of all foreign exchange reserves held in Swiss francs has historically been well below 0.5%. The daily trading market turnover of the franc, however, ranked fifth, or about 3.4%, among all currencies in a 2007 survey by the Bank for International Settlements.[40]

Canadian dollar

A number of central banks (and commercial banks) keep Canadian dollars as a reserve currency. In the economy of the Americas, the Canadian dollar plays a similar role to that played by the Australian dollar (AUD) in the Asia-Pacific region. The Canadian dollar (as a regional reserve currency for banking) has been an important part of the British, French and Dutch Caribbean states' economies and finance systems since the 1950s.[41] The Canadian dollar is also held by many central banks in Central America and South America. It is held in Latin America because of remittances and international trade in the region.[41]

Because Canada’s primary foreign-trade relationship is with the United States, Canadian consumers, economists, and many businesses primarily define and value the Canadian dollar in terms of the United States dollar. Thus, by observing how the Canadian dollar floats in terms of the US dollar, foreign-exchange economists can indirectly observe internal behaviours and patterns in the US economy that could not be seen by direct observation. Also, because it is considered a petrodollar, the Canadian dollar has only fully evolved into a global reserve currency since the 1970s, when it was floated against all other world currencies.

The Canadian dollar, since 2013, is ranked 5th among foreign currency reserves in the world.[42]

Chinese yuan

Chinese yuan officially became a world reserve currency on October 1, 2016. It represents 10.92% of the IMF's special drawing rights currency basket.[43][44] This makes Chinese yuan the third reserve currency after the US dollar and Euro.[43]

Calls for an alternative reserve currency

A report released by the United Nations Conference on Trade and Development in 2010, called for abandoning the U.S. dollar as the single major reserve currency. The report states that the new reserve system should not be based on a single currency or even multiple national currencies but instead permit the emission of international liquidity to create a more stable global financial system.[45][46][47]

Countries such as Russia and the People's Republic of China, central banks, and economic analysts and groups, such as the Gulf Cooperation Council, have expressed a desire to see an independent new currency replace the dollar as the reserve currency.

On 10 July 2009, Russian President Medvedev proposed a new 'world currency' at the G8 meeting in London as an alternative reserve currency to replace the dollar.[48]

China, Russia, India, Turkey, Brazil, Venezuela and other oil-producing countries have recently agreed "to transact all of their mutual trade and investment in their own currencies" effectively minimizing the need, at least in the short term, for a global reserve currency.[49] Nevertheless, at the beginning of the 21st century, gold and crude oil were still priced in dollars, which helps export inflation and has brought complaints about OPEC's policies of managing oil quotas to maintain dollar price stability.[50]

Reserve Currency Backed Tokens

In 2018 a new Reserve Currency Backed Token Exchange (RCBTE) rcbt exchange was announced by exchange CEO, John Ossenmacher, the RCBT facilitates issued tokens to be backed by Reserve Currencies. This system of secure digital backed tokens opens the door to a multiple reserve currency system. 17 April 2017.[51]

Special drawing rights

Some have proposed the use of the International Monetary Fund's (IMF) special drawing rights (SDRs) as a reserve.

China has proposed using SDRs, calculated daily from a basket of U.S. dollar, euro, Japanese yen and British pounds, for international payments.[52]

On 3 September 2009, the United Nations Conference on Trade and Development (UNCTAD) issued a report calling for a new reserve currency based on the SDR, managed by a new global reserve bank.[53] The IMF released a report in February 2011, stating that using SDRs "could help stabilize the global financial system."[54]

Further reading

  • Prasad, Eswar S. (2014). The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance. Princeton, NJ: Princeton University Press. ISBN 978-0-691-16112-9.

See also

References

  1. ^ "The Federal Reserve in the International Sphere", The Federal Reserve System: Purposes & Functions, a publication of the Board of Governors of the Federal Reserve System, 9th Edition, June 2005
  2. ^ Rogoff, Kenneth (October 2013). "America's Endless Budget Battle". Project Syndicate.
  3. ^ a b Pisani-Ferry, Jean; Posen, Adam S. (2009). The Euro at Ten: The Next Global Currency. United States of America: Peter G. Peterson Institute for International Economies & Brueggel. ISBN 9780881325584.
  4. ^ "A history of sterling" by Kit Dawnay, The Telegraph, 8 October 2001
  5. ^ Text of the Gold Standard Bill speech Archived 2 October 2009 at the Wayback Machine by Winston Churchill, House of Commons, 4 May 1925
  6. ^ Text of speech by Chancellor of the Exchequer Archived 2 October 2009 at the Wayback Machine Philip Snowden to the House of Commons, 21 September 1931
  7. ^ Eichengreen, Barry J. (15 September 2008). Globalizing Capital: A History of the International Monetary System. Princeton University Press. pp. 61–. ISBN 978-0-691-13937-1. Retrieved 23 November 2010.
  8. ^ http://www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/Appendix%201%20Final%20October%2015%202009.pdf
  9. ^ "IMF Releases Data on the Currency Composition of Foreign Exchange Reserves Including Holdings in Renminbi". Imf.org (in German). Retrieved 10 July 2018.
  10. ^ "IMF Data - Currency Composition of Official Foreign Exchange Reserve - At a Glance". Data.imf.org (in German). Retrieved 10 July 2018.
  11. ^ For 1995–99, 2006–17: "Currency Composition of Official Foreign Exchange Reserves (COFER)". Washington, DC: International Monetary Fund. 14 August 2018.
  12. ^ For 1999–2005: International Relations Committee Task Force on Accumulation of Foreign Reserves (February 2006), The Accumulation of Foreign Reserves (PDF), Occasional Paper Series, Nr. 43, Frankfurt am Main: European Central Bank, ISSN 1607-1484ISSN 1725-6534 (online).
  13. ^ Review of the International Role of the Euro (PDF), Frankfurt am Main: European Central Bank, December 2005, ISSN 1725-2210ISSN 1725-6593 (online).
  14. ^ Eichengreen, Barry (May 2005). "Sterling's Past, Dollar's Future: Historical Perspectives on Reserve Currency Competition". National Bureau of Economic Research (NBER). SSRN 723305. Missing or empty |url= (help)
  15. ^ a b c d e "The Retirement of Sterling as a Reserve Currency after 1945: Lessons for the US Dollar?", Catherine R. Schenk, Canadian Network for Economic History conference, October 2009.
  16. ^ "In a world of ugly currencies, the dollar is sitting pretty". Economist.com. 6 May 2010. Retrieved 22 August 2010.
  17. ^ Dollar 'losing grip as world's reserve currency' http://www.iol.co.za/business/markets/currencies/dollar-losing-grip-as-world-s-reserve-currency-1.1093803
  18. ^ IMF discusses plan to replace dollar as reserve currency http://money.cnn.com/2011/02/10/markets/dollar/index.htm
  19. ^ Central Banks Dump Treasuries As Dollar's Reserve Currency Status fades https://blogs.forbes.com/afontevecchia/2011/03/16/central-banks-dump-treasuries-as-dollars-reserve-currency-status-fades/
  20. ^ Why the Dollar's Reign Is Near an End http://online.wsj.com/article/SB10001424052748703313304576132170181013248.html
  21. ^ "U.N. sees risk of crisis of confidence in dollar", Reuters, 25 May 2011
  22. ^ "The Dollar and Its Rivals" by Jeffrey Frankel, Project Syndicate, 21 November 2013
  23. ^ Irwin, Neil (1 July 2014). "In BNP Paribas Case, an Example of How Mighty the Dollar Is". www.nytimes.com. The New York Times Company. Retrieved 13 July 2014.
  24. ^ Smolchenko, Anna (13 October 2014). "China, Russia seek 'international justice', agree currency swap line". news.yahoo.com. AFP News. Retrieved 13 October 2014.
  25. ^ Lim, Ewe-Ghee (June 2006). "The Euro's Challenge to the Dollar: Different Views from Economists and Evidence from COFER (Currency Composition of Foreign Exchange Reserves) and Other Data" (PDF). IMF.
  26. ^ "Euro could replace dollar as top currency-Greenspan", Reuters, 7 September 2007
  27. ^ Menzie, Chinn; Jeffery Frankel (January 2006). "Will the Euro Eventually Surpass The Dollar As Leading International Reserve Currency?" (PDF). NBER. Archived from the original (PDF) on 25 August 2013. Retrieved 11 October 2007.
  28. ^ "Aristovnik, Aleksander & Čeč, Tanja, 2010. "Compositional Analysis Of Foreign Currency Reserves In The 1999-2007 Period. The Euro Vs. The Dollar As Leading Reserve Currency," Journal for Economic Forecasting, Vol. 13(1), pages 165-181" (PDF). Institute for Economic Forecasting. 19 July 2010. Retrieved 5 July 2010.
  29. ^ "Currency Composition of Official Foreign Exchange Reserves (COFER) – Updated COFER tables include first quarter 2009 data. June 30, 2009" (PDF). Retrieved 8 July 2009.
  30. ^ "Euro Takes a Hit as Reserve Currency".
  31. ^ The euro as a reserve currency lodz.pl
  32. ^ "Born of a Panic: Forming the Fed System - The Region - Publications & Papers - The Federal Reserve Bank of Minneapolis". Minneapolisfed.org. Retrieved 6 December 2014.
  33. ^ "The United Nations Charter and Extra-State Warfare: The U.N. Grows Up". The World Financial Review. 13 November 2013. Retrieved 15 August 2014.
  34. ^ Blackden, Richard (23 January 2007). "Sterling surges to 14-year high". The Daily Telegraph. London. Retrieved 24 January 2007.
  35. ^ "Currency Strategists: Morgan Says Pound Is Euro Proxy". xak.com. Bloomberg. 8 February 2006.
  36. ^ "SDR Valuation", International Monetary Fund website: "The currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, and pound sterling). The SDR currency value is calculated daily (except on IMF holidays or whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five years."
  37. ^ Japanese Government Procurement, Japan External Trade Organization website (accessed: 6 January 2015)
  38. ^ "Is the Dollar Dying? Why US Currency Is in Danger" by Jeff Cox, CNBC, 14 February 2013
  39. ^ "A new global reserve?", The Economist, 2 July 2010
  40. ^ "Triennial Central Bank Survey, Foreign exchange and derivatives market activity in 2007" (PDF). Bank for International Settlements. December 2007.
  41. ^ a b "The Canadian Dollar as a Reserve Currency" by Lukasz Pomorski, Francisco Rivadeneyra and Eric Wolfe, Funds Management and Banking Department, The Bank of Canada Review, Spring 2014
  42. ^ "Currency Composition of Official Foreign Exchange Reserves (COFER)". www.imf.org. International Monetary Fund. 30 September 2014. Retrieved 1 October 2014.
  43. ^ a b "Special Drawing Right (SDR)".
  44. ^ "IMF Approves Reserve-Currency Status for China's Yuan". 30 November 2015 – via www.bloomberg.com.
  45. ^ "Scrap dollar as sole reserve currency: U.N. Report". Reuters.com. 29 June 2010. Retrieved 27 November 2011.
  46. ^ "UN report calls for new global reserve currency to replace U.S. dollar". People's Daily, PRC. 30 June 2010. Retrieved 27 November 2011.
  47. ^ Conway, Edmund (7 September 2009). "UN wants new global currency to replace dollar". London: The Telegraph. Retrieved 27 November 2011.
  48. ^ "Medvedev Shows Off Sample Coin of New 'World Currency' at G-8". Reuters.com. 10 July 2009. Retrieved 14 October 2010.
  49. ^ "World Tired of Paying Bill for US Military". therealnews.com. 27 December 2010.
  50. ^ Burleigh, Marc. "OPEC leaves oil quotas unchanged, seeing economic 'risks'." AFP, 11 December 2010.
  51. ^ [1]
  52. ^ "China backs talks on dollar as reserve -Russian source, Reuters, 19 March 2, 2009". Reuters.com. 19 March 2009. Retrieved 22 August 2010.
  53. ^ "UNCTAD Trade and Development Report 2009". Unctad.org. 6 October 2002. Retrieved 22 August 2010.
  54. ^ "IMF calls for dollar alternative" by Ben Rooney, CNN Money, 10 February 2011
Bancor

The bancor was a supranational currency that John Maynard Keynes and E. F. Schumacher conceptualised in the years 1940–1942 and which the United Kingdom proposed to introduce after World War II. The name was inspired by the French banque or ('bank gold'). This newly created supranational currency would then be used in international trade as a unit of account within a multilateral clearing system—the International Clearing Union—which would also have to be founded.

Bretton Woods system

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained its external exchange rates within 1 percent by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments. Also, there was a need to address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies as well.

Preparing to rebuild the international economic system while World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference. The delegates deliberated during 1–22 July 1944, and signed the Bretton Woods agreement on its final day. Setting up a system of rules, institutions, and procedures to regulate the international monetary system, these accords established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. The United States, which controlled two thirds of the world's gold, insisted that the Bretton Woods system rest on both gold and the US dollar. Soviet representatives attended the conference but later declined to ratify the final agreements, charging that the institutions they had created were "branches of Wall Street". These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.

On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end and rendering the dollar a fiat currency. This action, referred to as the Nixon shock, created the situation in which the U.S. dollar became a reserve currency used by many states. At the same time, many fixed currencies (such as the pound sterling) also became free-floating.

Canadian dollar

The Canadian dollar (symbol: $; code: CAD; French: dollar canadien) is the currency of Canada. It is abbreviated with the dollar sign $, or sometimes Can$ or C$ to distinguish it from other dollar-denominated currencies. It is divided into 100 cents (¢).

Owing to the image of a loon on the one-dollar coin, the currency is sometimes referred to as the loonie by foreign exchange traders and analysts, as it is by Canadians in general, or huard in French.

Accounting for approximately 2% of all global reserves, the Canadian dollar is the fifth most held reserve currency in the world, behind the U.S. dollar, the euro, the yen and the pound sterling. The Canadian dollar is popular with central banks because of Canada's relative economic soundness, the Canadian government's strong sovereign position, and the stability of the country's legal and political systems.

Deutsche Mark

The Deutsche Mark (German: [ˈdɔʏtʃə ˈmaɐ̯k] (listen), "German mark"), abbreviated "DM" or "D-Mark" , was the official currency of West Germany from 1948 until 1990 and later the unified Germany from 1990 until 2002. It was first issued under Allied occupation in 1948 to replace the Reichsmark, and served as the Federal Republic of Germany's official currency from its founding the following year until the adoption of the euro. In English it is commonly called the "Deutschmark" (); this expression is unknown in Germany. The Germans usually called it D-Mark when referring to the currency, and Mark when talking about individual sums.

In 1999, the Deutsche Mark was replaced by the Euro; its coins and banknotes remained in circulation, defined in terms of euros, until the introduction of euro notes and coins on 1 January 2002. The Deutsche Mark ceased to be legal tender immediately upon the introduction of the euro — in contrast to the other eurozone nations, where the euro and legacy currency circulated side by side for up to two months. Mark coins and banknotes continued to be accepted as valid forms of payment in Germany until 28 February 2002.

The Deutsche Bundesbank has guaranteed that all German marks in cash form may be changed into euros indefinitely, and one may do so in person at any branch of the Bundesbank in Germany. Banknotes and coins can even be sent to the Bundesbank by mail. In 2012, it was estimated that as many as 13.2 billion marks were in circulation, with one poll showing a narrow majority of Germans favouring the currency's restoration (although a minority believed this wouldn't bring any economic benefit).On 31 December 1998, the Council of the European Union fixed the irrevocable exchange rate, effective 1 January 1999, for German mark to euros as DM 1.95583 = €1.One Deutsche Mark was divided into 100 Pfennige.

Euro

The euro (sign: €; code: EUR) is the official currency of 19 of the 28 member states of the European Union. This group of states is known as the eurozone or euro area, and counts about 343 million citizens as of 2019. The euro is the second largest and second most traded currency in the foreign exchange market after the United States dollar. The euro is divided into 100 cents.

The currency is also used officially by the institutions of the European Union, by four European microstates that are not EU members, as well as unilaterally by Montenegro and Kosovo. Outside Europe, a number of special territories of EU members also use the euro as their currency. Additionally, 240 million people worldwide as of 2018 use currencies pegged to the euro.The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar.

As of August 2018, with more than €1.2 trillion in circulation, the euro has one of the highest combined values of banknotes and coins in circulation in the world, having surpassed the U.S. dollar.The name euro was officially adopted on 16 December 1995 in Madrid. The euro was introduced to world financial markets as an accounting currency on 1 January 1999, replacing the former European Currency Unit (ECU) at a ratio of 1:1 (US$1.1743). Physical euro coins and banknotes entered into circulation on 1 January 2002, making it the day-to-day operating currency of its original members, and by March 2002 it had completely replaced the former currencies. While the euro dropped subsequently to US$0.83 within two years (26 October 2000), it has traded above the U.S. dollar since the end of 2002, peaking at US$1.60 on 18 July 2008. In late 2009, the euro became immersed in the European sovereign-debt crisis, which led to the creation of the European Financial Stability Facility as well as other reforms aimed at stabilising and strengthening the currency.

European Payments Union

The European Payments Union (EPU) was an organization in existence from July 1950 to December 1958, when it was replaced by the European Monetary Agreement.

With the end of World War II, economic depression struck Europe. Of all the non-neutral powers, only the GDP of the United Kingdom had not decreased because of the war, Germany's GDP was at its 1908 level and France's at its 1891 level. Trade was based on US dollar reserves (the only acceptable reserve currency), which Europe lacked. Therefore, the transfer of money (immediately after each transaction) increased the opportunity cost of trading. Some trade was reduced to barter. The situation led the Organization for European Economic Cooperation (OEEC) to create the EPU, all members signing the agreement on 1 July 1950. The EPU accounted for trades but did not transfer money until the end of the month. It changed the landscape from bilateral trades of necessity (trading with partners because of outstanding debts) to multilateral trades. The EPU also forced liberalization by mandating that members eliminate discriminatory trade measures. The EPU was a general success with trade levels more than doubling during its existence. By its close in 1958, convertibility of currency was a possibility, no longer needing government permissions in European countries.

Exorbitant privilege

The term exorbitant privilege refers to the benefit the United States has due to its own currency (i.e., the US dollar) being the international reserve currency. Accordingly, the US would not face a balance of payments crisis, because it purchased imports in its own currency. Exorbitant privilege as a concept cannot refer to currencies that have a regional reserve currency role, only global reserve currencies.Academically, the exorbitant privilege literature analyzes two empiric puzzles, the position and the income puzzle. The position puzzle consists of the difference between the (negative) U.S. net international investment position (NIIP) and the accumulated U.S. current account deficits, the former being much smaller than the latter. The income puzzle consists of the fact that despite a deeply negative NIIP, the U.S. income balance is positive, i.e. despite having much more liabilities than assets, earned income is higher than interest expenses.

Fixed exchange-rate system

A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed against either the value of another single currency, a basket of other currencies, or another measure of value, such as gold.

There are benefits and risks to using a fixed exchange rate. A fixed exchange rate is typically used to stabilize the value of a currency by directly fixing its value in a predetermined ratio to a different, more stable, or more internationally prevalent currency (or currencies) to which the value is pegged. In doing so, the exchange rate between the currency and its peg does not change based on market conditions, unlike in a flexible exchange regime. This makes trade and investments between the two currency areas easier and more predictable and is especially useful for small economies that borrow primarily in foreign currency and in which external trade forms a large part of their GDP.

A fixed exchange-rate system can also be used to control the behavior of a currency, such as by limiting rates of inflation. However, in doing so, the pegged currency is then controlled by its reference value. As such, when the reference value rises or falls, it then follows that the value(s) of any currencies pegged to it will also rise and fall in relation to other currencies and commodities with which the pegged currency can be traded. In other words, a pegged currency is dependent on its reference value to dictate how its current worth is defined at any given time. In addition, according to the Mundell–Fleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy to achieve macroeconomic stability.

In a fixed exchange-rate system, a country’s central bank typically uses an open market mechanism and is committed at all times to buy and/or sell its currency at a fixed price in order to maintain its pegged ratio and, hence, the stable value of its currency in relation to the reference to which it is pegged. To maintain a desired exchange rate, the central bank during a time of private sector net demand for the foreign currency, sells foreign currency from its reserves and buys back the domestic money. This creates an artificial demand for the domestic money, which increases its exchange rate value. Conversely, in the case of an insipient appreciation of the domestic money, the central bank buys back the foreign money and thus adds domestic money into the market, thereby maintaining market equilibrium at the intended fixed value of the exchange rate.In the 21st century, the currencies associated with large economies typically do not fix (peg) their exchange rates to other currencies. The last large economy to use a fixed exchange rate system was the People's Republic of China, which, in July 2005, adopted a slightly more flexible exchange rate system, called a managed exchange rate. The European Exchange Rate Mechanism is also used on a temporary basis to establish a final conversion rate against the euro from the local currencies of countries joining the Eurozone.

International monetary systems

An international monetary system is a set of internationally agreed rules, conventions and supporting institutions that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. It should provide means of payment acceptable to buyers and sellers of different nationalities, including deferred payment. To operate successfully, it needs to inspire confidence, to provide sufficient liquidity for fluctuating levels of trade, and to provide means by which global imbalances can be corrected. The system can grow organically as the collective result of numerous individual agreements between international economic factors spread over several decades. Alternatively, it can arise from a single architectural vision, as happened at Bretton Woods in 1944.

International status and usage of the euro

The international status and usage of the euro has grown since its launch in 1999. When the euro formally replaced 12 currencies on 1 January 2002, it inherited their use in territories such as Montenegro and replaced minor currencies tied to the pre-euro currencies, such as in Monaco. Four small states have been given a formal right to use the euro, and to mint their own coins, but all other usage has been unofficial outside the eurozone (the EU states who have adopted the euro). With or without an agreement these countries, unlike those in the eurozone, do not participate in the European Central Bank or the Eurogroup.

Its international usage has also grown as a trading currency, acting as an economic or political alternative to using the United States dollar. Its increasing usage in this sense has led to its becoming the only significant challenger to the US dollar as the world's main reserve currency.

International use of the U.S. dollar

Besides being the main currency of the United States, the American dollar is used as the standard unit of currency in international markets for commodities such as gold and petroleum (the latter, sometimes called petrocurrency, is the source of the term petrodollar). Some non-U.S. companies dealing in globalized markets, such as Airbus, list their prices in dollars.

The U.S. dollar is the world's foremost reserve currency. In addition to holdings by central banks and other institutions, there are many private holdings, which are believed to be mostly in one-hundred-dollar banknotes (indeed, most American banknotes actually are held outside the United States). All holdings of U.S.-dollar bank deposits held by non-residents of the United States are known as "eurodollars" (not to be confused with the euro), regardless of the location of the bank holding the deposit (which may be inside or outside the U.S.).

Economist Paul Samuelson and others (including, at his death, Milton Friedman) have maintained that the overseas demand for dollars allows the United States to maintain persistent trade deficits without causing the value of the currency to depreciate or the flow of trade to readjust. But Samuelson stated in 2005 that at some uncertain future period these pressures would precipitate a run against the U.S. dollar with serious global financial consequences.

Japanese yen

The yen (Japanese: 円, Hepburn: en, symbol: ¥; code: JPY; also abbreviated as JP¥) is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro, and the pound sterling.

The concept of the yen was a component of the Meiji government's modernization program of Japan's economy, which postulated the pursuit of a uniform currency throughout the country, modelled after the European decimal currency system.

Before the Meiji Restoration, Japan's feudal fiefs all issued their own money, hansatsu, in an array of incompatible denominations. The New Currency Act of 1871 did away with these and established the yen, which was defined as 1.5 g (0.048 troy ounces) of gold, or 24.26 g (0.780 troy ounces) of silver, as the new decimal currency. The former han (fiefs) became prefectures and their mints private chartered banks, which initially retained the right to print money. To bring an end to this situation, the Bank of Japan was founded in 1882 and given a monopoly on controlling the money supply.Following World War II the yen lost much of its prewar value. To stabilize the Japanese economy the exchange rate of the yen was fixed at ¥360 per $1 as part of the Bretton Woods system. When that system was abandoned in 1971, the yen became undervalued and was allowed to float. The yen had appreciated to a peak of ¥271 per $1 in 1973, then underwent periods of depreciation and appreciation due to the 1973 oil crisis, arriving at a value of ¥227 per $1 by 1980.

Since 1973, the Japanese government has maintained a policy of currency intervention, and the yen is therefore under a "dirty float" regime. This intervention continues to this day. The Japanese government focuses on a competitive export market, and tries to ensure a low yen value through a trade surplus. The Plaza Accord of 1985 temporarily changed this situation from its average of ¥239 per US$1 in 1985 to ¥128 in 1988 and led to a peak value of ¥80 against the U.S. dollar in 1995, effectively increasing the value of Japan’s GDP to almost that of the United States. Since that time, however, the yen has greatly decreased in value. The Bank of Japan maintains a policy of zero to near-zero interest rates and the Japanese government has previously had a strict anti-inflation policy.

List of countries by foreign-exchange reserves

Foreign-exchange reserves (also called Forex reserves) are, in a strict sense, only the foreign-currency deposits held by national central banks and monetary authorities (See List of countries by foreign-exchange reserves (excluding gold)). However, in popular usage and in the list below, it also includes gold reserves, special drawing rights (SDRs) and International Monetary Fund (IMF) reserve position because this total figure, which is usually more accurately termed as official reserves or international reserves or official international reserves, is more readily available and also arguably more meaningful.

These foreign-currency deposits are the financial assets of the central banks and monetary authorities that are held in different reserve currencies (e.g. the U.S. dollar, the Euro, the Japanese yen and the Pound sterling) and which are used to back its liabilities (e.g. the local currency issued and the various bank reserves deposited with the central bank by the government or financial institutions). Before the end of the gold standard, gold was the preferred reserve currency. Some nations are converting foreign-exchange reserves into sovereign wealth funds, which can rival foreign-exchange reserves in size.

The list below is mostly based on the latest available IMF data, and while most nations report in U.S. dollars, a few nations in Eastern Europe report solely in Euros. And since all the figures below are in U.S. dollar equivalents, exchange rate fluctuations can have a significant impact on these figures.

List of currencies in the Americas

There are 39 currencies currently in official use in the Americas. All de jure present currencies in the Americas are listed here, including currencies from countries which are not sovereign states or dependencies.

A commonly used currency in the Americas is the United States dollar. It is the world's largest reserve currency, the resulting economic value of which benefits the U.S. at over $100 billion annually. However, its position as a reserve currency damages American exporters because this increases the value of the United States dollar. The United States dollar is also "standard" in international commodity markets. In the phenomenon known as 'dollarization', the U.S. dollar has been adopted as the official currency of several other countries. However, semi-dollarization also exists in a few other countries where the U.S. dollar is recognised as legal tender alongside another currency, and unofficial dollarization exists in many areas where the U.S. dollar is widely used and accepted-although it is not recognised as legal tender. Ecuador uses the United States dollar (the French overseas department French Guiana uses the euro, the currency of France).

The Brazilian real is considered a strong South American currency; under presidents Luiz Inácio Lula da Silva and Dilma Rousseff, the real almost tripled in value, resulting in a vast change in economics, with many people who were middle class benefiting greatly. The minimum wage was raised, and Brazil's position as a leading exporter of raw materials, including soya beans and iron ore was underlined, but they are responsible for Brazil's improved economy, which damaged the "competitiveness of manufacturing", reducing the amount of exports.The Chilean currency, the Chilean peso, is also strong. However, this again means that manufacturing struggles, as cheaper imports are pricing them out of business. In January 2011, after Chile announced that in 2011 the country planned to buy foreign reserves of $12 billion, the peso experienced an immediate fall in value. The country's main export is copper to China and India. The currency strength has resulted in over-high wages, and high inflation.The East Caribbean dollar is the most used currency by the number of countries in the Caribbean utilizing it. The East Caribbean dollar is pegged to the United States dollar, and has been for over 35 years since 1976, having previously been pegged to the pound sterling. In 1965, the East Caribbean Currency Authority was established (coming after the British Caribbean Currency Board), to distribute currency, but The Bahamas withdrew from the organisation to create its own bank. The East Caribbean dollar is used in all seven member countries of the Organisation of Eastern Caribbean States (OECS) and Anguilla (a British overseas territory); the only OECS member using a different currency is the British Virgin Islands, a British overseas territory where the U.S. dollar is the official currency. Cuba and Panama both use two currencies. Cuba is attempting to gradually phase out the Cuban convertible peso, unifying the two in the Cuban peso. Although there is no confirmed timescale for the reform, whilst quoting Cuban economists, Reuters gave an estimation of 18 months (from October 2013). Panama uses the United States dollar informally, but additionally uses the Panamanian balboa as legal tender.

Petrocurrency

Petrocurrency, is a neologism used with three distinct meanings, often confused:

Dollars paid to oil producing nations (Petrodollar or Petrodollar recycling) A term invented in the 1970s meaning Trading surpluses of oil-producing nations.

Currencies of oil-producing nations which tend to rise in value against other currencies when the price of oil rises (and fall when it falls).

Pricing of oil in US Dollars: Currencies used as a unit of account to price oil in the international market.

Petrodollar warfare

The term, petrodollar warfare, refers to the alleged motivation of US military offensives as preserving by force the status of the United States dollar as the world's dominant reserve currency and as the currency in which oil is priced. The term was coined by William R. Clark, who has written a book with the same title. The phrase oil currency war is sometimes used with the same meaning.

Renminbi

The renminbi (Ab.: RMB; simplified Chinese: 人民币; traditional Chinese: 人民幣; pinyin: rénmínbì; literally: 'people's currency'; sign: 元/¥; code: CNY) is the official currency of the People's Republic of China. The yuan (Chinese: 元; pinyin: yuán) is the basic unit of the renminbi, but is also used to refer to the Chinese currency generally, especially in international contexts where "Chinese yuan" is widely used to refer to the renminbi. The distinction between the terms renminbi and yuan is similar to that between sterling and pound, which respectively refer to the British currency and its primary unit. One yuan is subdivided into 10 jiao (Chinese: 角; pinyin: jiǎo), and a jiao in turn is subdivided into 10 fen (Chinese: 分; pinyin: fēn). The renminbi is issued by the People's Bank of China, the monetary authority of China.Until 2005, the value of the renminbi was pegged to the US dollar. As China pursued its transition from central planning to a market economy, and increased its participation in foreign trade, the renminbi was devalued to increase the competitiveness of Chinese industry. It has previously been claimed that the renminbi's official exchange rate was undervalued by as much as 37.5% against its purchasing power parity. More recently, however, appreciation actions by the Chinese government, as well as quantitative easing measures taken by the American Federal Reserve and other major central banks, have caused the renminbi to be within as little as 8% of its equilibrium value by the second half of 2012. Since 2006, the renminbi exchange rate has been allowed to float in a narrow margin around a fixed base rate determined with reference to a basket of world currencies. The Chinese government has announced that it will gradually increase the flexibility of the exchange rate. As a result of the rapid internationalization of the renminbi, it became the world's 8th most traded currency in 2013, and 5th by 2015.On 1 October 2016, the RMB became the first emerging market currency to be included in the IMF's special drawing rights basket, the basket of currencies used by the IMF (reserve currency).

Triffin dilemma

The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies. This dilemma was identified in the 1960s by Belgian-American economist Robert Triffin, who pointed out that the country whose currency, being the global reserve currency, foreign nations wish to hold, must be willing to supply the world with an extra supply of its currency to fulfill world demand for these foreign exchange reserves, thus leading to a trade deficit.

The use of a national currency, such as the U.S. dollar, as global reserve currency leads to tension between its national and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account, as some goals require an outflow of dollars from the United States, while others require an overall inflow.

Specifically, the Triffin dilemma is usually cited to articulate the problems with the role of the U.S. dollar as the reserve currency under the Bretton Woods system. John Maynard Keynes had anticipated this difficulty and had advocated the use of a global reserve currency called 'Bancor'. Currently the IMF's SDRs are the closest thing to the proposed Bancor but they have not been adopted widely enough to replace the dollar as the global reserve currency.

In the wake of the financial crisis of 2007–2008, the governor of the People's Bank of China explicitly named the reserve currency status of the US dollar as a contributing factor to global savings and investment imbalances that led to the crisis. As such the Triffin Dilemma is related to the Global Savings Glut hypothesis because the dollar's reserve currency role exacerbates the U.S. current account deficit due to heightened demand for dollars.

World currency

In the foreign exchange market and international finance, a world currency, supranational currency, or global currency is a currency that is transacted internationally, with no set borders.

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