Reserve currency.

In plain English

A reserve currency is money that governments and central banks hold in size outside its home country and that private parties use widely for invoicing trade, issuing debt, and settling payments. Status comes from deep and liquid government bond markets, open capital flows, predictable rule of law, and habit, because everyone uses it partly because everyone else already does. The issuing country gains steady demand for its debt and cheaper borrowing. It also imports demand for its currency that can hold the exchange rate above what its exporters would prefer.

01Why it matters

It is why oil, shipping, and much international debt are priced in dollars even when neither party is American, and why a change in US interest rates moves borrowing costs in countries far away.

02The math, step by step

Say a country holds 100 billion dollars of reserves and 70 billion of that sits in one reserve currency. If that currency weakens 10 percent against the rest of the basket, the reserve pile loses about 7 billion dollars of purchasing power without a single transaction taking place.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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