Reserve Currencies, With Specific Reference to How

¶ … reserve currencies, with specific reference to how an asset manager should approach the issue of diversifying into multiple reserve currencies in order to achieve better stability in asset value.

While the U.S. dollar and the euro are the world's two leading reserve currencies, two new currencies have been added by the IMF to the list of reserve currencies. These are the Canadian dollar and the Australian dollar, both being commodity-driven currencies whose stock has risen significantly in the past decade, in part because of the commodity market and in part because those two countries have robust banking sectors and therefore avoided the worst of the 2008 global recession (RT, 2013). This paper will examine the issue of reserve currencies. For a company doing business internationally, is there any merit to using secondary reserve currencies like the aforementioned CAD and AUD, or the Swiss franc, British pound or yen for that matter?

One of the most important issues in asset management is to find ways to preserve the value of assets. Holding assets in stable currencies has always been a necessity, as stable currencies preserve their value better than unstable ones. Stability encourages investment in a currency for reserve purposes -- that is to say strictly as a store of value. Banks, including central banks, hold reserve currencies around the world. Prior to this year, there were five such currencies. Most of the work of reserve currencies around the world was done with the euro and the U.S. dollar. The British pound, Swiss franc and Japanese yen were the other reserve currencies.

The euro's problems are much-publicized. Being that these problems are structural, it is unlikely that they will be resolved any time soon. The euro's weaknesses, therefore, will inhibit further growth in the euro as a reserve currency. The U.S. dollar also faces challenges, namely in the political mess the U.S. is in where the threat of default is a political tool and where the country is dependent on foreign oil. Investors have responded to these weaknesses in the world's leading reserve currencies by seeking to diversify their currency holdings. The IMF announcement reflects the high degree to which banks and central banks have diversified into the Canadian and Australian dollars, and there is talk that the New Zealand dollar is next.