There has been a lot of discussions recently on the international usage of the US dollar (USD) as a currency for trade and investment payments that stems from its role as a reserve currency. The war in Ukraine has given rise to concerns about the USD’s role as a currency that can be used freely for international payments, or for keeping reserves to make international payments when needed. In the context of geo-political tensions, there is speculation on whether the Chinese currency can be a better reserve currency or whether there will be a flight to gold, triggered by reports of central banks buying the metal.
Traits of a reserve currency: What is a reserve currency? What are its characteristics? It is one that is held by countries as foreign exchange reserves. These are required to meet the gap between a country’s international payments and receipts and serve as a buffer to meet any contingency. Such reserves can be held in form of gold or any foreign currency that can be freely used—or what is called a fully convertible currency.
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