Foreign Currency Reserves
A reserve currency is the foreign currency held as international exchange reserves by major financial institutions and central banks. Today, the U.S. dollar as a foreign reserve currency is the largest among the nations of the world. The drop in the U.S. currency exchange rates against the E.U.’s euro raises the question of whether the dollar will follow the historical lead of the U.K.’s pound in losing its status as the dominate international reserve currency among the world's nations.
Foreign Reserves Fuel the Market for Currenices
In an October 12, 2009 article "Dollar Reaches Breaking Point as Banks Shift Reserves," Bloomberg.com's Ye Xie and Anchalee Worrachate report that Barclays Capital data show a 63% second quarter 2009 increase in euro and yen foreign reserve investments. A U.S. Treasury Department report states that from the end of 1999 to second quarter 2008, foreign reserves in dollars fell from 71% to 62.5%, while euro holdings rose from 18% to 27%.
The E.U.'s euro was introduced in 1999 at a one to one parity with the U.S. dollar. By July 2008, one euro cost one dollar and fifty-seven cents. This suggests that a one dollar transaction received the equivalent of approximately an .64 cent price value in a dollar-euro exchange by the summer of 2008.
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