Reserve Currency

A reserve currency is a currency that monetary authorities outside its home country hold as part of their official reserves. Every central bank keeps a stock of foreign assets it can use to settle cross-border obligations, intervene in currency markets, and reassure lenders, and it has to choose what those assets are denominated in. The currencies chosen most often are reserve currencies, and by a wide margin the largest is the U.S. dollar.

No agency defines the phrase by rule. It is descriptive language that central banks and the International Monetary Fund use about what is actually held; the IMF publishes the underlying measurement quarterly in its survey of the currency composition of official foreign exchange reserves. The Federal Reserve uses the phrase plainly, concluding in a 2025 staff note that "the dollar remains by far the dominant reserve currency."

What being the reserve currency actually looks like, in measurements. The Federal Reserve's 2025 staff assessment of the dollar's international role reports that the dollar made up 58 percent of disclosed global official foreign exchange reserves in 2024, against 20 percent for the euro, 6 percent for the Japanese yen, 5 percent for the British pound and 2 percent for the Chinese renminbi. That figure has fallen from a peak of 72 percent in 2001, but the Fed's reading of the decline is specific: reserve managers added "a wide range of smaller currencies, including the Australian and Canadian dollars," and the dollar "only returned to about the share it had in 1995." The share has been "basically unchanged since 2022, when it accounted for 58 percent of reserves," which the note treats as evidence that sanctions on Russia did not trigger a reallocation out of dollars.

Reserves are only one of the roles, and the others are larger. The Bank for International Settlements found the dollar on one side of about 88 percent of global foreign exchange transactions in April 2022, against 31 percent for the euro; because every trade involves two currencies those shares sum to 200 percent. Over 1999 to 2019 the dollar accounted for 96 percent of trade invoicing in the Americas, 74 percent in the Asia-Pacific region and 79 percent in the rest of the world, with Europe the exception at 66 percent euro. Roughly 55 percent of international and foreign-currency bank claims and 60 percent of such liabilities are denominated in dollars. Research cited by the Fed estimates that over half of countries had their currency anchored to the dollar in 2019. And Federal Reserve Board staff estimate that over $1 trillion in dollar banknotes were held outside the United States in the first quarter of 2025, roughly half of all dollar banknotes outstanding.

The supply side is a bond market, not a printing press. The bulk of official dollar reserves is held as U.S. Treasury securities, and the Fed reports that as of the first quarter of 2025, $9 trillion or 32 percent of marketable Treasury securities outstanding were held by foreign investors, official and private, with 55 percent held by private domestic investors and 13 percent by the Federal Reserve System. That share has come down from almost 50 percent in 2014. The scale of the market is the point: the Fed contrasts the roughly $700 billion of jointly-backed European Union debt outstanding by May 2025 with over $28 trillion of U.S. Treasuries. When the Fed discusses what could make the euro a stronger competitor, the qualities it names are a large economy, "fairly deep financial markets, generally free trade, and robust and stable institutions," plus the development of "a large, liquid market for EU bonds." Those are the properties a reserve currency needs, described from the outside.

Institutional plumbing supports the role. Because dollar funding is in particularly high demand during crises, the Federal Reserve introduced temporary currency swap lines with foreign central banks in the 2008 to 2009 financial crisis, made a subset of them permanent in 2013, expanded operations again in March 2020, and in 2021 made permanent a repurchase facility available to foreign and international monetary authorities holding accounts at the Federal Reserve Bank of New York. A currency whose issuer stands behind offshore funding markets in a crisis is more attractive to hold than one whose issuer does not.

The gold question, which is where intuition fails. The share of gold in official reserve assets more than doubled, from below 10 percent in 2015 to over 23 percent as of the Fed's July 2025 note. The obvious inference is that central banks are selling dollars to buy gold, and the Fed says that inference is wrong. The increase "mostly reflects the over 200 percent increase in the gold price over that period," while the physical quantity of gold held "has only increased by less than 10 percent," and research it cites finds that increases in gold holdings "are generally not associated with a decline in U.S. dollar reserves except for China, Russia, and Turkey." A share measured at market value rises when the price rises, whether or not anyone bought anything.

The Triffin dilemma is the structural cost of the role. Federal Reserve History describes it directly, as the problem that undid the Bretton Woods system: it "occurs when a country issues a global reserve currency ... because of its global importance as a medium of exchange. The stability of that currency, however, comes into question when the country is persistently running current account deficits to fulfill that supply. As the current account deficits accumulate, the reserve currency becomes less desirable and its position as a reserve currency is threatened." The world wants more of the reserve asset than the issuer can supply without running external deficits, and the deficits are themselves the reason to doubt the asset. In the 1960s that arithmetic became literal, because dollars outstanding came to exceed the gold the United States had promised to exchange them for.

The mechanism is circular and self-reinforcing. Exporters price goods in a currency that buyers everywhere can obtain, so trade invoicing concentrates. Firms that earn and owe in that currency borrow in it, so debt issuance concentrates. Central banks whose banks and firms have those obligations hold reserves in it, so official reserves concentrate. Each of those decisions makes the market in the currency deeper and cheaper to transact in, which makes the next decision easier. The issuer's government bond market has to be large, liquid and creditworthy enough to absorb the resulting demand, which is why reserve status tends to belong to a country with a very large stock of marketable government debt.

A hypothetical example of the demand side. A central bank in a commodity exporting country holds $40 billion of reserves and wants to cover six months of imports, most of which are invoiced in dollars. If it holds reserves in dollars, its assets and its likely obligations move together, and it can sell Treasury bills on any business day at a known price. If it holds them in a smaller currency instead, it takes on the risk that the currency it holds falls against the currency it owes, and it accepts a thinner market to sell into during exactly the crisis when it needs the money. Multiplied across a hundred monetary authorities, that calculation is most of what reserve-currency status is.

Pros for the issuing country

• Persistent foreign demand for the issuer's government debt, which supports demand at auction across the yield curve.
• The ability to borrow abroad in its own currency, so a fall in that currency does not increase the real burden of the debt.
• Trade and finance conducted in the home currency, which removes exchange rate risk for the country's own firms.
• Financial and legal influence, because the currency's payment system and the assets reserves are held in sit under the issuer's jurisdiction.

Costs and risks

• The Triffin dilemma: supplying the world's reserve asset points toward persistent external deficits, which accumulate into a reason to doubt the currency.
• Foreign demand can push the currency higher than domestic conditions would warrant, which weighs on exporters.
• Reserve status is a measured share, not a legal status, so it can erode gradually and without any single decision by anyone.
• Using the currency's plumbing as a policy instrument gives other countries a reason to build alternatives, even if the Fed's own data show little reallocation so far.