Reserve currency is a term used to describe a foreign currency that is kept in significant quantities by many governments and financial institutions as a part of their foreign exchange reserves. The reserve currency allows the issuing country to purchase goods at a lower rate than other nations. Reserve currencies are also used for globally traded goods such as Oil and gold. Holding currency reserves limits exchange rate risk as the buying nation will not have to exchange their currency for the reserve one to make a purchase.
The main reserve currencies in use today are the Euro and the U.S dollar. The dollar is the most widely held reserve currency and is the currency most bought and sold in foreign exchange markets. The Euro is the second most widely held reserve currency despite in recent years it being impacted by the global debt crisis and the issues currently found in the Eurozone.