International reserve currency refers to the international common currency funds held by national governments that can be directly used for international payments.It is the part of the international liquidity that the government can readily use to pay for gold as the international reserve currency to maintain the exchange rate of its own currency or to intervene in the foreign exchange market.
According to the statistical standards set by the International Monetary Fund for member states, the international reserve currency composition of a country is as follows:
- Monetary gold reserves held by the government.
- A freely convertible currency held by the government.
- Reserve positions at the IMF.
- The INTERNATIONAL Monetary Fund allocates the country unused Special Drawing Rights.
- Monetary funds as international reserves must meet two conditions.
- First, it belongs to the government and can be used freely.
- The second is high liquidity, that is, these assets are internationally common, and the government can be used for international payments or intervention in the foreign exchange market at any time.
Source of international reserve currency
- Gold purchased by governments or central banks.
- International balance of payments surplus, especially current account surplus, is the main source of increasing international reserve currency.
- The central bank intervenes the foreign exchange received in the foreign exchange market, that is, in order to prevent the rise of the local currency exchange rate, it sells the local currency in the foreign exchange market, collects the foreign exchange and increases the international reserve currency.
- Special Drawing Rights allocated by the International Monetary Fund.
- Foreign borrowing by governments or central banks can temporarily replenish the international reserve currency, but as the borrowing is used or repaid, these reserves fall back to their original levels.