A reserve currency is a foreign exchange instrument held in significant quantities by central banks, governments, and monetary authorities as an integral part of foreign exchange reserves. Reserve currencies are critical for international commerce and investments and are the lynchpin of the global economy.
The U.S. dollar is a fiat currency that has been the leading instrument for just over a century. A fiat currency derives its value from the full faith and credit of the government that issues the legal tender. The U.S.’s stable political and economic systems and position as the world’s wealthiest and most powerful nation established the dollar as the leading reserve currency.
