Currency Guide to Reserve and Safe Haven Currencies

Reserve and Safe Haven Currencies

What is a Reserve Currency?

A reserve currency or anchor currency is a currency that is held in large quantities by institutions and government as part of their foreign exchange reserves.

It is also used as the international pricing standard for globally traded goods such as oil, gold and other materials.

By having a substantial amount of reserve currencies a country can purchase those goods at a lower rate than other nations, as they will have to exchange their currencies with each purchase and pay a transaction cost.

A country with a major currency is often able to borrow money at better rate as there is a larger and more stable market for them than other lesser currencies.

Reserve currencies have always been used since the Roman age. The most commonly held present day reserve currencies are the US Dollar and the Euro.

What is a Safe Haven Currency?

A safe haven currency is a currency that investors move their money to in times of upheaval.

Factors affecting their decisions can be political, economical, natural or financial. Other names for a safe haven currency are Hard currency or strong currency.

Many currencies have been classed as safe haven over the years but due to the continually changing nature of the financial markets none of them stay that way for long.

The countries most often listed as safe havens are those that continually have a high trade surplus, China is a recent example of this.

Previous safe haven currencies have been the US Dollar, Euro, British Pound, Swiss Franc, and Japanese Yen.

One measure of safe haven currencies is how much they are favoured in a countries foreign exchange reserves.

When a currency is regarded a soft currency there are expectations that the currency in question is set to fluctuate erratically or depreciate in value against other currencies.

The most widely-used Reserve currencies are the US Dollar, Euro, British Pound and Japanese Yen.

Countries with the most Reserve Currency

Countries can hold reserve currencies for a number of reasons. The amount a nation holds is an indication of a nation’s ability to pay off foreign debts, to defend a national currency and to determine credit ratings.