What is ‘Key Currency’
The currency used as a reference in an international transaction or when setting an exchange rate. The key currency used is usually issued by a stable, developed country such as the United States. Central banks also hold key currencies in reserve (reserve currency).
Explaining ‘Key Currency’
As a monetary practice, countries with smaller or less-dominant economies sometimes align their exchange rates with the dominant trading partner. The central bank of some developing countries may fix the exchange rate to the key currency, which has the effect of limiting monetary policy flexibility but can also increase confidence in the country’s economy.
Further Reading
- Global imbalances and the key currency regime: the case for a commodity reserve currency – www.tandfonline.com [PDF]
- What ever happened to Germany? Is the decline of the former European key currency country caused by structural sclerosis or by macroeconomic mismanagement? – www.tandfonline.com [PDF]
- Key currency competition: The Euro versus the dollar – journals.sagepub.com [PDF]
- Inertia of the US Dollar as a Key Currency through the Two Crises – www.tandfonline.com [PDF]
- Financial capital movements and central bank behavior in a two-country, short-run portfolio balance model – www.sciencedirect.com [PDF]
- The macroeconomic implications of a key currency – www.nber.org [PDF]
- Inertia in the key currency – www.sciencedirect.com [PDF]
- Key currency status: An exorbitant privilege and an extraordinary risk – www.sciencedirect.com [PDF]
- Volatility of RMB and its Impact on Regional Currency Cooperation [J] – en.cnki.com.cn [PDF]
- The key currency proposal – academic.oup.com [PDF]
