What is a world reserve currency

I have always wondered why dollars were used for investing and not the brokers own currency, so I did a bit of research.

A world reserve currency is a large amount of currency that is held by central banks and major financial institutions to be used for international transactions or investments.

World reserve currencies are held by countries for a variety of reasons.

A world reserve currency is important for foreign exchange because it allows two countries to structure a deal using a currency that is easily convertible and a stable source of value.

• Reserve currencies are an important indicator to repay foreign debt
• Defend a national currency
• Sovereign credit ratings — An esteemed of the ability and willingness to repay its public debt both in principal and in interests on time.

Central banks often use their resaves to defend their exchange rate.

What is the world reserve currency and how it came to be?

The US Dollar is currently the world reserve currency and overtook the GB pound in 1929 due to financial market development .

The first currencies were precious metals such as gold and silver. They are tradable, fungible, universally recognized and respected. The problem with using precious metals as a reserve currency is because there is not enough of it to provide the market with enough depth and liquidity.

Therefore, the great British pound (GBP) became the world’s first world reserve currency up to World War 2 during the days of the British empire due to their economic and political influence.

At the end of World War 2 in the Bretton Woods Conference in 1944 it was clear America would emerge as a global economic super power. It was agreed that the dollar, which had been slowly increasing its share of international trade and GDP (gross domestic product), would replace the pound as the worlds reserve currency using gold as a fixed exchange rate mechanism.

Originally published at https://www.seanbarrett.uk on April 23, 2022.