Reserve Currency
The currency used as the standard for international transactions and foreign reserves — currently the US dollar. That is why US interest rates and policy move markets worldwide.
Reserve currency = the currency at the center of world trade settlement and countries' foreign exchange reserves
When U.
In plain terms
A reserve currency is the money the whole world uses as a "common standard" when trading and settling payments. Today the US dollar plays that role. When a country buys crude oil, or when two other countries trade with each other, payment is usually made in dollars.
That's why central banks around the world hold large amounts of dollars (foreign exchange reserves). Because the dollar is the world's benchmark money, what happens in the U.S. — especially with interest rates — spreads across the globe.
What it tells you
Because the dollar is the reserve currency, the Federal Reserve's rate decisions aren't a U.S.-only matter. When U.S. rates rise, money worldwide moves toward the safer, higher-yielding dollar, and other countries' stock markets and currencies get shaken.
That's why markets outside the U.S. are also strongly affected by U.S. rates and dollar movements. When U.S. monetary policy shifts, the ripple reaches them too.
Formula
Reserve currency = the currency at the center of world trade settlement and countries' foreign exchange reserves In practice, the US dollar (USD) plays that role today
What high or low means
When U.S. rates rise or a crisis hits, money tends to flow into the dollar as the safe reserve currency, and the dollar tends to strengthen. A stronger dollar can also pull funds out of emerging markets.
Conversely, when the U.S. lowers rates, the dollar tends to weaken, and risk-taking money can spread into other markets.
Saying "the dollar is always safe because it's the reserve currency" is an oversimplification. The dollar's value also swings with the U.S. economy and policy, and there is always discussion that the reserve currency's standing could change over the long run.
Reserve currency status doesn't change overnight, but that doesn't make U.S. policy's impact any smaller. A single U.S. interest rate move spreads worldwide.
Exchange rates and currency flows belong to the macro domain. This term is background knowledge for understanding market news. (※ Our screens deal with individual companies' SEC-filed financials.)
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This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.