What Are Reserve Assets?
Reserve assets are financial assets denominated in foreign currencies held by central banks and used to balance payments. The U.S. dollar (USD) is a reserve currency held as a reserve asset globally.
Key Takeaways
- Reserve assets are currencies or other assets, such as gold, that can be readily transferable and used to balance international transactions and payments.
- A reserve asset must be available, physical, and controlled by policymakers.
- The U.S. dollar is the main reserve currency held as a reserve asset globally.
Types of Reserve Assets
A reserve asset must be readily available to monetary authorities, easily transferable, and a physical asset commonly controlled by policymakers. Reserve assets include currencies, commodities, or other financial capital held by monetary authorities to finance trade imbalances and check the impact of foreign exchange fluctuations.
According to the International Monetary Fund's (IMF) balance of payments manual, reserve assets include:
- Gold
- Tradable foreign currencies, such as the USD or euro (EUR).
- Special drawing rights (SDRs) to obtain foreign exchange or reserve assets from IMF members.
- Reserves the country has given to the IMF and available to the member country.
Before the Bretton Woods Agreement ended in 1971, most central banks used gold as their reserve asset. Central banks may hold gold, but this practice has been supplanted by holding reserves of tradable foreign currencies.
Currency Manipulation
Reserve assets can be used to fund currency manipulation activities by the central bank. In general, it is easier to push the value of a currency down than to prop it up since propping up the currency involves selling off reserves to buy domestic assets. This can burn through reserves quickly.
A weak currency is usually a sign of deteriorating economic conditions, which the central bank will try to correct using internal credit or money supply controls or possibly selling foreign reserves to buy the currency.
The central bank can put downward pressure on the currency by adding more money into the system and using that money to buy foreign assets. The downside to this strategy is the potential for increased inflation.
Reserve Assets Example
As of Nov. 2023, U.S. Reserve Assets totaled $243,312 million, with $11,041 million held in gold, $165,235 million in Special Drawing Rights, $30,733 million in reserve position with the IMF, and $36,303 million in foreign currencies.
When exchange rates of major reserve currencies move along with the market prices of securities held by central banks, this impacts the currency composition of official foreign reserves exchange rates. In 2022, the USD appreciated, and other currencies lost value against the currency.
However, the euro remained steady in 2022 as the second most important global currency despite the turbulent geopolitical climate, like Russia’s war in Ukraine.
What Was the Bretton Woods Agreement?
The Bretton Woods Agreement was negotiated in July 1944 by delegates from 44 countries at the United Nations Monetary and Financial Conference held in Bretton Woods, New Hampshire, to establish gold as the basis for the U.S. dollar, and other currencies were pegged to the U.S. dollar’s value.
Who Controls the U.S. Gold Reserves?
The Federal Reserve Bank of New York is the guardian of U.S. gold for the U.S. government, foreign governments, other central banks, and official international organizations. Individuals and private sector entities are not permitted to store gold in the vault.
Why Do Countries Hold Reserve Assets?
A country holds reserve assets to meet its balance of payments, the way countries monitor all international monetary transactions.A government can sell reserve assets to devalue or boost its currency.
The Bottom Line
Reserve assets include gold and tradable foreign currencies, such as the USD or EUR. These assets can be used by a central bank or country to manipulate currency value or to meet the balance of payments.
