This substantial reserve underscores China’s dominant economic position and its robust export-driven economy. The dollar’s centrality to the system of global payments also increases the power of U.S. financial sanctions. Almost all trade done in U.S. dollars, even trade among other countries, can be subject to U.S. sanctions, because they are handled by so-called correspondent banks with accounts at the Federal Reserve. By cutting off the ability to transact in dollars, the United States can make it difficult for those it blacklists to do business. For example, in the wake of the Russian invasion of Ukraine in 2022, unprecedented U.S. sanctions cut Russia off from the dollar, freezing $300 billion in Russian central bank assets and triggering a default on the country’s sovereign debt. “There’s no doubt that if the dollar were not so widely used, the reach of sanctions would be reduced,” says Setser.
Navigating the Rupee’s Decline: Challenges and Opportunities for India’s Economy
After the euro’s share of global official foreign exchange reserves approached 25% as of year-end 2006 (vs 65% for the U.S. dollar; see table above), some experts have predicted that the euro could replace the dollar as the world’s primary reserve currency. See Alan Greenspan, 2007;29and Frankel, Chinn (2006) who explained how it could happen by 2020.3031However, as of 2022 none of this has come to fruition due to the European debt crisis which engulfed the PIIGS countries from 2009 to 2014. Instead the euro’s stability and future existence was put into doubt, and its share of global reserves was cut to 19% by year-end 2015 (vs 66% for the USD).
Foreign exchange reserves, also called Forex reserves, in a strict sense, are foreign-currency deposits held by nationals and monetary authorities. Foreign exchange reserves are critical assets for any country, comprising foreign currency deposits, gold, and other international assets held by central banks. These reserves are essential for facilitating international trade, ensuring currency stability, and providing a financial buffer in times of economic uncertainty. As of the first quarter of 2024, let’s delve into the top 10 countries with the highest foreign exchange reserves, including gold, and see where major economies like India, China, and the US stand. A reserve currency is a foreign currency that a central bank or treasury holds as part of its country’s formal foreign exchange reserves.
India’s Foreign Reserves
The euro is the second most used reserve currency, accounting for roughly 20 percent of global foreign exchange reserves. The European Union rivals the United States in economic size, exports more, and boasts a strong central bank and robust financial markets—factors that make its currency a viable challenger to the dollar. But the lack of a common treasury and a unified European bond market limits its attractiveness as a reserve currency, according to Setser.
- Former Federal Reserve Chair Ben Bernanke has argued that the United States’ declining share of the global economy and the rise of other currencies such as the euro and yen have eroded the U.S. advantage.
- Foreign exchange reserves are assets that are denominated in a foreign currency held by a central bank.
- The value of SDRs are calculated from a basket determined by the IMF of key international currencies, which as of 2016 consisted of the United States dollar, euro, renminbi, yen, and pound sterling.
- “There’s no doubt that if the dollar were not so widely used, the reach of sanctions would be reduced,” says Setser.
- This chart was updated in November 2024 and reports data available at that time.
- However, sanctions imposed by the European Union (EU), the U.S., and other nations in response to Russia’s invasion of Ukraine in February 2022 rendered most of those reserves inaccessible to the central bank.
- The United Kingdom, which also did not make the top 10 list, held $213 billion in foreign reserves as of June 2024.
The U.S. treasury market remains by far the world’s largest and most liquid—the easiest to buy into and sell out of—bond market. Foreign exchange reserves are a fundamental aspect of a nation’s financial health, providing a safety net against economic volatility and facilitating international trade. China’s dominant reserve position, significantly larger than India’s, illustrates the diverse economic strategies and financial strengths of these countries.
Chinese renminbi
Some have proposed the use of the International Monetary Fund’s (IMF) special drawing rights (SDRs) as a reserve. The value of SDRs are calculated from a basket determined by the IMF of key international currencies, which as of 2016 consisted of the United States dollar, euro, renminbi, yen, and pound sterling. These sources provided the necessary data on foreign exchange reserves, including gold, for the top 10 countries as of the first quarter of 2024.
In addition to facilitating trade, top 10 foreign reserve country most countries, including China, also hold foreign exchange reserves to ensure the stability of their currencies and facilitate other foreign transactions. Foreign currency reserves can also be used to control exchange rates, which in turn affects global trade. If a currency, whether fixed or floating, begins to deviate from its desired rate with a foreign currency, the central bank can buy and sell reserves as needed to restore the intended exchange rate.
- A country might draw down its foreign reserves if it needs to sell them in order to stabilize its currency or prop up its economy, especially if the domestic currency falters.
- The data are noon buying rates in New York for cable transfers payable in foreign currencies.
- If a currency, whether fixed or floating, begins to deviate from its desired rate with a foreign currency, the central bank can buy and sell reserves as needed to restore the intended exchange rate.
- The euro is the second most used reserve currency, accounting for roughly 20 percent of global foreign exchange reserves.
- Almost all trade done in U.S. dollars, even trade among other countries, can be subject to U.S. sanctions, because they are handled by so-called correspondent banks with accounts at the Federal Reserve.
Timeline of Swiss reserves
When China’s and Hong Kong’s reserves are considered together, the total is more than $4 trillion. Asian and South Asian nations dominate foreign currency reserves, accounting for eight of the top 10. The United States is also harmed by currency manipulation—when another country holds down the value of its currency to maintain a large trade surplus. If a country keeps the value of its currency artificially low by accumulating dollar reserves, its exports will become more competitive, while U.S. exports will become comparatively more expensive.
Register today and get free and unlimited access to all Goldhub market data, tools and analysis. Reserve currencies have come and gone with the evolution of the world’s geopolitical order. International currencies in the past have (excluding those discussed below) included the Greek drachma, coined in the fifth century B.C.E., the Roman denarii, the Byzantine solidus and Islamic dinar of the middle-ages and the French franc.
“Sanctions are an effective tool, but we have to be careful,” CFR’s Benn Steil told NPR. Some experts say this benefit is modest, pointing to the fact that other developed countries are able to borrow at similarly low rates. Former Federal Reserve Chair Ben Bernanke has argued that the United States’ declining share of the global economy and the rise of other currencies such as the euro and yen have eroded the U.S. advantage. “The exorbitant privilege is not so exorbitant any more,” Bernanke wrote in 2016. According to an analysis of foreign exchange reserves, China has the largest foreign exchange reserve in the world, holding over $3.6 trillion.