The Role of the U.S. Dollar

For nearly a century, the United States dollar has served as the world’s premier reserve currency, taking the crown once worn by the pound sterling. When a country acquires reserve currencies, it parks them with its central bank. The reserves are acquired through trade, with the acquiring country selling goods in exchange for particular currencies.

Reserve currencies are foreign currencies held by central banks for a variety of reasons. They grease the wheels of international commerce by helping countries and businesses conduct transactions using the same currency, a much simpler task than settling transactions involving different currencies. Countries also may hold reserve currencies:

• To manage exchange rates
• To protect against an inability to pay for imports due to a lack of capital inflows
• To protect against periods of financial disruption and economic shock, such as wars and natural disasters

Which Currencies Are Held As Reserve Currencies?

Reserve currencies are typically those issued by developed, stable countries because other countries believe they can depend upon them. The U.S. dollar made up the greatest portion of disclosed global reserve currencies held, at approximately 57% as of the third quarter of 2025, according to the International Monetary Fund (IMF). Following the U.S., other currencies most widely held in reserves were:

• Euro: 20%
• Yen: 6%
• British Pound Sterling: 5%
• Canadian Dollar: 3%
• Chinese Renminbi: 2%

The U.S. dollar portion of all reserves was at its greatest in 2001, at 72%. Its proportional decline to 57% reflects the move by foreign reserve managers to diversify their portfolios with a wide range of other countries’ currencies. Despite this decline, the dollar holds about the same portion that it had in 1995, and remains the dominant reserve currency.

Countries That Hold the Greatest Amount of Foreign Reserve Currencies

Based on 2024 IMF data, the 10 countries that held the greatest amount of foreign reserve currencies were:

• China: 26.3%
• Japan: 9.2%
• Switzerland: 6.6%
• India: 4.7%
• Russia: 4.4%
• Hong Kong: 3.4%
• Saudi Arabia: 3.2%
• South Korea: 3.0%
• Germany: 2.8%
• Singapore: 2.7%

What Makes a Currency a Reserve Currency?

Countries don’t fill out an application to have their currencies become reserve currencies, and there is no international organization that confers this status. To get a seat at the grown-ups’ table, it helps to be a developed country with a big economy and relatively free capital flows, to have a banking system able to handle being a creditor, and to have export clout.

These requirements make reserve currency status a rich-world club, much to the chagrin of many developing countries. Some countries whose currencies are not sought after as reserve currencies, such as Brazil, Russia, and India—three of the BRICS countries—have been vocal proponents of the creation of a reserve currency unattached to any one country.

Cries for a global reserve currency grow louder when the dollar is comparatively weak, since a weak dollar makes U.S. exports cheaper and can erode trade surpluses in other export-dominated economies. Critics of a dollar-dominated currency market have pointed out that it may be increasingly difficult for the U.S. to keep up with world dollar demand as its weight in the global economy shrinks. Rather than use the dollar, central banks have looked towards using a basket of currencies, called special drawing rights. This protocol would effectively reduce the influence of any one country and ostensibly would force more prudent economic policies.

Advantages of Having Reserve Currency Status

Why all the hubbub surrounding reserve currency status? For the country issuing a reserve currency, transaction costs are lower, since both sides of the transaction involve the same currency. In addition, reserve currency-issuing countries are not exposed to the same level of exchange rate risk, especially when it comes to commodities, which are often quoted and settled in dollars.

Because other countries want to hold a currency in reserve and use it for transactions, the higher demand means lower borrowing costs through depressed bond yields (most reserves consist of government bonds). Issuing countries are also able to borrow in their home currencies and are less worried about propping up their currencies to avoid default.

Challenges and Drawbacks of Reserve Currency Status

Reserve currency status isn’t without its drawbacks, and the problems issuing countries face underscore why mature economies tend to be the ones whose currencies are widely held.

Low borrowing costs associated with issuing a reserve currency may prompt loose spending by both the public and private sectors, which may result in asset bubbles and ballooning government debt. Stimulus spending in the U.S., for example, can lead other countries to fear a weak dollar since that could erode the value of the dollar-denominated reserves (e.g., Treasury securities) that they hold.

Another possible drawback relates to the idea, proposed by economist Robert Triffin in 1959, that demand for a reserve currency could result in the currency-issuing country running a constant trade deficit. The country could end up issuing growing amounts of debt that eventually lead to a loss of confidence in the currency. This points to a country prioritizing global liquidity over its own economic well-being.

The Bottom Line

In a global economy, where countries ship commodities and goods at a frenetic pace, the fear of markets seizing up due to monetary constraints is not likely to diminish. Major economic events, such as the 2007-2008 financial crisis, still can increase the pressure on the dollar, especially in light of public debt prospects and political brinksmanship. Countries without reserve currency status may fear that their fates are tied to macroeconomic and political decisions that are outside of their control.

Reserve currencies have their advantages and disadvantages. For the U.S. dollar in particular, the push for a global reserve currency tied to no one country is not new. Just as investors seek to hold a diverse portfolio of investments rather than a solitary stock, central banks follow the same course when it comes to managing their reserve currencies.