2

Do Russia, China, Venezuela, Cuba, Iran, Pakistan, etc. use US$ as their reserve currency?

If yes, I am curious why.

Why don't they use Euro or Chinese Yuan?

3
  • 1
    There is no need to limit one’s reserves to one currency only. E.g., China holds both US dollars and euros (and apparently British pounds and Japanese yens, too).
    – chirlu
    May 21, 2018 at 19:55
  • @chirlu there's a subtle difference between what a country holds in its forex reserves and what it has for a reserve currency. The reserve currency is part of the forex reserves but not everything in the forex reserves is the reserve currency
    – Gramatik
    May 21, 2018 at 20:12
  • 1
    First, OP seems misunderstood the functionality of "reserve currencies", it is NOT a saving of a country, but a buffer for foreign trade and currency exchange. Today, many countries carry bunch of different currency, mostly depends on preference. Rules of thumb : Nobody want to hold a volatile currency en.wikipedia.org/wiki/Reserve_currency
    – mootmoot
    May 22, 2018 at 14:24

2 Answers 2

9

Yes, the United States dollar is the de facto reserve currency.

Why not something else?

  • The three biggest economies can't agree on a change to the status quo.
    • The US doesn't want to change, because it wants its dollar to be the reserve currency. This gives it both cheaper trading goods and influence economically.
    • Europe might prefer the Euro, but it doesn't want the Chinese Renminbi (also known as the Yuan).
    • China would prefer the Renminbi, but it doesn't want the Euro.
  • The US dollar is convenient for US trading partners like Japan, Canada, and Mexico. Even China gets some advantages from the status quo, although overall they'd prefer a change.
  • Russia does not like the dollar, but the Euro is not better from their perspective. The Renminbi might be better, but they wouldn't be crazy about empowering China that way.
  • Others may also worry that China would abuse additional authority if it had it.
  • Other countries that might prefer a change are unlikely to push one, as it might offend the US. However, if they could follow someone else's push, they might do that.
  • Other countries don't want to be the first to switch, because the only country that currently always takes Renminbi is China. However, the US imports more of most things than China, and more countries already take the US dollar. The whole point of a shared currency is to avoid situations where you can't find anyone from whom to buy with your currency holdings.
  • Existing wealthy people have their money in the dollar. A switch from the dollar to something else would effectively make them less rich. This makes existing rich people of many countries opposed to swapping out the US dollar.
  • While the US has a relatively benevolent and stable history as a holder of foreign funds, China is less so. Rich people may simply not be interested in storing their money there.
  • It would cost either Europe or China a lot of work and money to change the existing perceptions.
    • Europe probably can't, as it lacks a strong government across the Euro area.
    • China could, but it has not yet seen fit to do so. Its current program of foreign aid might eventually lead to that, but they would have to loosen up the restrictions. The goal would have to be for third parties to trade with each other in the Renminbi. To date, China has been encouraging people to trade with them, which is less useful in terms of promoting their currency.

China has proposed making a basket of currencies the reserve currency. This could operate similarly to how the special drawing rights of the International Money Fund work. Presumably such a basket would include the US dollar, the Euro, and the Renminbi. It would likely also need to include currencies like the British pound and the Japanese Yen. Perhaps the Indian rupee.

To reiterate, most of the reasons come down to China and Russia not being willing to support the Euro while Europe and the US are not willing to support the Renminbi. Other countries don't do enough of their trading with China or partners who accept the Renminbi to make the switch, which of course keeps other countries from making the switch. This may change over time. Either China or Europe could start doing the hard, expensive work of luring people to their currency.

2
  • Trump has used the dollar's reserve currency status to impose sanctions on Iran that basically lock it out of the dollar system. This creates an opportunity for Europe to push the Euro as a an alternative to the Dollar with lower political risk. May 22, 2018 at 9:16
  • When someone writes Renminbi it makes me think of the Lethal Weapon movie series May 22, 2018 at 12:32
2

Generally speaking the answer is Yes, the reserve currency for all countries you listed is the USD. The simple reason for this is that everyone else also uses USD, and that the potential political benefit of switching to something else is outweighed by the economic detriment of having to convert out of/back to USD to trade globally.

That said, there are pushes by several of the countries you listed to change this dollar-dominated global economic system. The Euro is currently the next most viable alternative for a country to use, and Iran has stated that it wishes to receive Euros for its oil. Russia also expressed interest in moving away from receiving USD for its oil, though it didn't specify what would replace USD.

All of the countries you listed may well begin predominantly using Chinese Yuan, it's just that it is only recently that China opened up enough economically for the Yuan to be desirable as something for countries to include in their forex reserves, and USD has a massive head start. Change is slow and impeded by the status quo, but the Yuan is growing and it is likely that those opposed to the USD-dominated global economic system will hop on board.

You must log in to answer this question.