What does it mean to be a reserve currency? How did the U.S. dollar achieve reserve status? And what does the "exorbitant privilege" mean for the U.S.? NEPC's Jennifer Appel, CFA breaks it down in today's Topic Talks.

1. P R O P R I E T A R Y & C O N F I D E N T I A L
UNDERSTANDING RESERVE CURRENCY
JUNE 2021
Jennifer Appel, CFA, Research Consultant, Asset Allocation
TOPIC TALKS

2. 2
WHAT DOES IT MEAN TO BE A RESERVE
CURRENCY?
Notes: As recognized by the International Monetary Fund (IMF)
Source: IMF
WORLD RESERVE CURRENCIES
U.S. Dollar (USD)
Euro (EUR)
Chinese Renminbi (CNY)
Japanese Yen (JPY)
British Pound (GBP)
Australian Dollar (AUD)
Canadian Dollar (CAD)
Swiss Franc (CHF)
Commonly Used in
Global Transactions
1
Significant Quantities
Held by Central Banks
2
Outsized Impact on
Global Markets
3

3. 3
0%
20%
40%
60%
80%
100%
1999 2002 2005 2008 2011 2014 2017 2020
US Dollar
Euro
Japanese Yen
British Pound
Australian Dollar
Swiss Franc
Canadian Dollar
Chinese Renminbi
Other Currencies
WORLD FOREIGN EXCHANGE RESERVES BY CURRENCY
Notes: Represents allocated reserves denominated in USD.
Sources: IMF COFER, FactSet

4. 4
GLOBAL CURRENCY IN TRADE FINANCE MARKET
Notes: As of April 30, 2021
Source: SWIFT
0% 20% 40% 60% 80% 100%
Other Currencies
IDR
JPY
CNY
EUR
USD

5. 5
HOW DID THE U.S. DOLLAR ACHIEVE RESERVE
STATUS?
 Global trade facilitated
by exchange stability
 Trade surplus countries
accumulated gold
 Disrupted by the First
World War
 European countries
lowered pegs or
abandoned gold
 German hyperinflation
 Global currency
devaluations “race to the
bottom”
 U.S. dollar convertible to
gold
 Other currencies
convertible to USD
 International Monetary
Fund and World Bank
established
 U.S. gold supply
inadequate to cover gold
conversions from USD
 USD devalued in 1971,
then gold peg removed
 Global currencies
government-backed and
float
 USD-centric finance and
trade infrastructure
maintained
Floating Fiat
Regime
(1973 - Present)
Bretton Woods
Agreement
(1944 - 1971)
Modified Gold
Standard
(1918-1944)
Fixed Exchange
Gold Standard
(1870-1914)

6. 6
IMPLICATIONS FOR THE UNITED STATES
UNDERSTANDING THE “EXORBITANT PRIVILEGE”*
Notes: *Former French Finance Minister Valéry Giscard d’Estaing used this terminology in the 1960s
 The U.S. is able to impose
financial sanctions given its
widespread use in
international finance and
trade
 This is a powerful tool to
reduce the ability of
companies or countries to
transact in USD and can
isolate them from the global
economy
 Persistent demand for U.S.-
denominated assets
amplifies liquidity
 Demand also allows for
larger and cheaper debt
issuance (“exporting
inflation”)
Geopolitical Power
Liquidity Benefit Safe-Haven Quality
 The USD tends to rally
during times of market
volatility and uncertainty
 This relationship persists
given the continued
resilience of the U.S.
economy and demand for
dollar-denominated assets

7. 7
POTENTIAL FUTURES
1. USD remains the global standard
2. Reserves and trades migrate towards
a market basket of multiple currencies
3. Sub-global trade zones hub around
U.S., China, and European currencies
4. System replaced by one world
currency and global central bank
5. Digital currency based on Blockchain
technology
Source: IMF
0%
25%
50%
75%
100%
1981 1986 1991 1996 2001 2006 2011 2016
IMF SDR BASKET
USD DEM FRF EUR GBP JPY CNY

8. 8
Past performance is no guarantee of future results.
Information on market indices was provided by sources external to NEPC. While NEPC has exercised reasonable professional care in
preparing this report, we cannot guarantee the accuracy of all source information contained within.
The goal of this report is to provide a basis for substantiating asset allocation recommendations. The opinions presented herein
represent the good faith views of NEPC as of the date of this report and are subject to change at any time.
All investments carry some level of risk. Diversification and other asset allocation techniques do not ensure profit or protect against
losses.
NEPC DISCLOSURES