I think it functions as a universal currency within the system.  All currencies (USD, EUR, BTC) within the ripple platform are IOU's, tokens that represent trust in an issuer.  To clear those trust lines and settle this debt you need to redeem those IOU's.  You need to cash them out and remove them from the ripple platform.  If you want to switch issuers you can trade them within ripple, or cash out and buy back in through another issuer.  XRP offers another avenue to clear those trust lines.  By using the platform you are trusting the ripple network, and ripples tokens (XRP) by default.  This allows XRP fo function as trustless within the ripple network, allowing you to "cash out" without leaving the platform.  It also provides more paths to exchange as any currency or commodity will likely be traded against XRP even if there isn't a direct exchange.  So you can still trade your BTC for pork belly futures even if there is no direct exchange rate because both will have a market with XRP.

Oh yeah, there's reserve too (basically just antispam).