KEY POINTS:
The US dollar and the Euro are the most widely held reserve currencies. A reserve currency is held in significant quantities by governments and institutions, chosen by the banking community on the strength of the economy in which it's used. It also tends to be the international pricing currency for products traded on a global market, such as oil or gold.
The British pound sterling was the main reserve currency for much of the world in the 18th and 19th centuries. However, the cost of WWI and WWII, and periods of economic weakness in the Britain during the second half of the 20th century saw the US dollar eventually topple sterling as the world's most powerful currency.
The US dollar's dominance has waned a little since the introduction of the Euro in 1999. The Euro is now the single European currency for 13 countries (as of January 2008), and more are expected to join.
Another threat to the US dollar's dominance are the actions of China. The world's fastest-growing economy holds the biggest foreign currency reserves (more than $992 billion), and has hinted that it may shift some away from the US dollar and into other world currencies.
New Zealand's currency history
As a former British colony, New Zealand's currency was based on the pound sterling until 1967, when the country converted to a decimal-based currency. The value of the 'Kiwi' was briefly set against the US dollar, but in 1985 the Labour Government floated it on the foreign exchange market, meaning its value was determined by supply and demand.
The foreign exchange market exists wherever one currency is traded for another. It is the world's largest financial market in the world and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions.
How exchange rates work
The exchange rate between two currencies specifies how much one currency is worth compared with the other.
If the Kiwi is 'weak' or 'down' against the US dollar, that means demand for it on the foreign exchange market is low, so its value is low. If the exchange rate is 'strong' or 'up' between the two countries, demand is high, so up goes the value of the Kiwi.
For most people the exchange rate really comes into play when they're travelling. If the Kiwi is weak against the euro and you're going to, Spain, for instance, $10 won't convert to many euros. However, if the Kiwi is strong or high against the euro, your $10 will stretch a lot further.
In the past few years the Kiwi dollar has been very strong against the US dollar, causing headaches for exporters who sell their goods in US dollars.
