An international currency is not just a currency kept in reserves of other Central Banks. Reserve currencies generally have other features that distinguish them from gold to be regarded as worthy of being kept as reserves. They also don't evolve to this position in one day, year, or decade. It takes time and an advanced economy behind an international currency, which hosts deep financial markets, has trade bonds with the world and military strength.
I will briefly share the five pillars that make a currency international. These are the features Barry Eichengreen et al. evaluate while discussing the euro's trajectory since its inception.
1. International reserve currency: Holding reserve currencies or foreign-denominated assets has become more important after the Asian Crisis in 1997. Countries hold the currencies that are seen as safe havens to get through possible dire straits and economic contagions. An international currency would be one of the top currencies preferred to be held.
Below is a graph showing the share of reserve currencies in the world. (I must note that this graph is quite in contradiction with the authors' calculation on page 120 and another graph here.) The changing shares and dynamic nature of perceived reserve currencies are compatible with the authors' view that there may be more than one -and competing- reserve currencies in the international arena for a long time.
2. Global foreign exchange market turnover: The global foreign exchange (forex) market has a daily turnover of over 6 trillion US dollars. According to BIS data, US $ was one of the pairs in 88% of the exchanges in 2019. This indicator is useful to understand which currency is the main anchor in the international market today.
3. International bond denomination: The financial depth in a country allows its currency to attract international demand. This leads foreign debtors to issue bonds in this currency, not only because they will get loans with the best rates, but also they will be able to make use of different instruments in these financial supermarkets. The authors explain this as follows:
(...) denominating one’s debt securities in the same currency as other issuers enables investors to readily compare returns and makes it easier for new issuers to secure loans on international capital markets. Borrowing costs will be lowest in the deepest and most liquid financial market, which possesses its depth and liquidity because it is the market to which importers and exporters turn for trade finance. The country with the deepest and most liquid financial market will similarly be attractive as a place for investors from other countries to hold their foreign balances, since investors value the ability to buy and sell without moving prices. Thus, not only private investors seeking to diversify their portfolios but also central banks and governments, when deciding on the composition of their foreign reserves, will be drawn to the currency of the country with the deepest and most liquid financial markets—in other words, the same currency to which other investors are drawn.
4. Unit of invoicing and settling international transactions: A country's high trade volume may carry its currency to the higher ranks internationally; however the currency becomes truly international when third parties use it as means of payment between each other. Here is the authors's explanation on this:
Expressing the price of one’s exports in the same currency as other exporters enables customers to easily compare prices and facilitates the efforts of entrants to break into international markets. Since intermediate inputs, when sourced from abroad, will similarly be priced and invoiced in the dominant international currency, a firm will prefer to express the prices of its exports in that same currency, thus preventing its costs from fluctuating relative to its revenues when the exchange rate changes.
5. Anchor currency for exchange rates of other countries: The number of countries which peg their currency to another one is an indicator of the latter's international status. Anchoring may be a result of political influence as well; as having an international currency is not independent of political might.
Here is a nice graph showing the dominant currencies' position with respect to some of these features:
I wanted to note these features down here just to remember them while evaluating cryptocurrencies' and some other stable coins' (e.g. Libra -or by its new name "Diem") prevalence in the future. They present hints to people who ponder on how central banks' balance sheets will look like in the future and what it takes for a currency to thrive in the international arena. It is important to realize that "stability of value" is inherently included in the above-mentioned features. Noone would invoice (or accept an invoice) in a currency that has an unstable value. It should also be kept in mind that keeping a currency in reserves is not only an economic decision but also a political one. Commonwealth countries' reserve policies, some sub-Saharan countries pegging their currency to the French franc, or Bretton Woods participants' decision can be given as examples of this aspect of decision making.
