Reserve currency is the foreign currency held by a country's central bank or related financial institutions, generally accounting for a certain percentage, and is an important part of a country's foreign exchange reserves. Reserve currency can be used for international trade and investment, and to deal with government external debts. At the level of currency issuance, reserve currency is also a foundation and the credit of the country's currency. Therefore, the amount of reserve currency will definitely affect the stability of the country's currency exchange rate.

In the 19th century and the first half of the 20th century, the British pound was the main reserve currency for most countries in the world. However, in the second half of the 20th century, the US dollar replaced the British pound. Since the world's major commodities are priced and paid in reserve currencies, the role of reserve currencies in the global economy is quite important.

According to data released by the IMF, as of the first quarter of 2020, the U.S. dollar accounted for the largest share of global foreign exchange reserves, totaling $6.794 trillion, or 61.9% of global foreign exchange reserves, followed by the euro, which accounted for about 20%. Other currencies such as the Japanese yen accounted for 5.6%, the British pound accounted for 4.4%, and the renminbi remained stable at 1.9%.

Why is the US dollar the world's most important reserve currency?

In 1944, the US dollar was linked to gold after the Bretton Woods Conference, and the dollar standard was established after the gold standard. Since then, the US dollar has been defined as the main reserve currency by major countries. In the past few decades of development, most global trade and commodities (especially oil) are denominated in US dollars, so the world uses the US dollar as the center of currency issuance. Even after the 1970s, the US dollar faced huge depreciation pressure and eventually decoupled from gold. Most countries in the world adopted a floating exchange rate system, but they were unable to break away from the US dollar-centered structure and economic model.

Since the United States is still the world's largest economy and has a significant influence on the world in other areas including politics, technology, diplomacy, and military, the US dollar is still the most important currency at present, and its influence is global, including global inflation and asset price trends. In fact, in an extremely uncertain environment, the US dollar is the only safe-haven currency. Today, governments around the world and investors of all sizes are most concerned about the US economy and are constantly analyzing every move of the Federal Reserve's monetary policy.