The role of the US dollar in global finance

The volume of the financial market is currently several times larger than the volume of the real sector of the economy, at the end of 2011 the volume of world GDP was 62.9 trillion dollars, the volume of the world financial market was more than 250 trillion dollars, a quarter of which was in the US financial market 64, 2 trillion dollars With the development of globalization, the financial sector is also developing, interaction between countries is expanding, the number of participants, their level, states, organizations, companies, individual investors and borrowers is increasing, the range and complexity of transactions is expanding, new institutions and intermediaries are emerging. 

The demand for the national currency of a state is one of the main indicators of its influence and importance for world finance, as well as the degree of interdependence of states and the degree of confidence of other states in this one. The more actively the currency is used on the world market, the more important the role of the issuing state in world finances. 

For several decades, the US dominated world finance, and the dollar was the de facto world currency. However, the growth of the economy of other participants in the world market in recent years has intensified discussions about the need to review the state of affairs in connection with changing forces in the world, the rapid growth of developing countries, as well as the development of the eurozone. These discussions intensified during the global crisis of 2008-2009, which began with the mortgage crisis in the United States. The expansion of the crisis to a global scale has increased the desire of the rest of the world to reduce their dependence on the US economy. 

With the onset of the economic crisis, the fate of the pound began to be predicted for the dollar, when the relative decline of the British Empire after the end of the First World War led not only to the decline in the dominance of the pound, but to its collapse. The whole world, including developing countries, which have long been comforting themselves with the idea of ​​the need to reduce dependence on  the US economy , are actively engaged in the search for an alternative to the dollar. 

One of the consequences of the search for an alternative to the dollar was the rise in gold prices. With the increase in demand for gold, its price began to gradually rise, passing the historical mark of $ 1,000 per troy ounce. Demand for the European single currency increased, backed by good performance of the European economy, economic growth in the euro area exceeded the pre-crisis rate in the United States. Former Fed chief Alan Greenspan praised the outlook for the euro, even saying that the European currency could replace the US dollar as the world's main reserve currency. China , the country with the largest foreign exchange reserves in the world, 

took up the reduction of the use of the dollar in its calculations , a decision was made and agreements were signed with a number of countries on the use of the Chinese national currency in international settlements.

In search of an alternative to the dollar to store their reserves, countries remembered the special drawing rights (SDRs) issued by the IMF. In 2009, the idea of ​​issuing new IMF bonds, stimulated by the statements of a number of countries, including Russia and China , was approved by a special UN commission, SDRs worth $250 billion were issued for the reserves of 186 IMF member countries. 

The search for an alternative to the dollar and the success of the euro as a regional currency led to discussions about the possibility of creating a single currency in other regions of the world, in particular, in the countries of the Persian Gulf - Gulf dinar and Latin America - Sucre. 

After the peak of the crisis has already been overcome and economic growth has begun in the United States, US GDP growth in 2011 was 1.7%, projected for 2012 is 2.7%, consider how far the world market participants have advanced in their desire to reduce the use of the dollar in international transactions and reduce the weight of the United States in world finance. In particular, how did this affect the value of the dollar as a settlement and reserve currency, as well as the demand for US government treasury bonds. 

US dollar as an international settlement currency 
The settlement function of the currency is determined by the demand for the currency when concluding contracts for the export and import of goods and services. The national currency of the United States is one of the main currencies in which international contracts are nominated, including on the key energy market for the economy. 

The demand for currency in international settlements is indicated by its use in the international foreign exchange market when conducting foreign exchange transactions. The foreign exchange market is an indispensable link in the implementation of trade transactions and investments, as well as risk insurance in the world market. 

The daily volume of currency exchange transactions is several trillion dollars. According to the Bank for International Settlements - BIS, the dollar is the most popular currency in international currency exchange transactions. In 2011, the share of the dollar in the total volume of transactions decreased compared to 2007 from 85.6% to 84.9% out of 200%; 1% and from 17.2 to 19%, respectively. However, it should be noted that the rate of decline in the share of the dollar during the crisis years slowed down from 2-3% observed in previous years from 2001 to 2004. The share of the dollar fell from 89.9 to 88%, from 2004 to 2007 from 88 to 85 .6%. 

The decline in the share of the dollar and the increase in the share of other currencies is largely facilitated by the factor of globalization, the expansion of the participation of developing countries in international economic relations, due to which the number of currency exchange operations involving their monetary units is growing. 

It is interesting to look at the data in terms of regional preferences in foreign exchange transactions. A published study by the European Central Bank showed that euro exchange transactions are most popular in the Eurozone itself, almost 60% of all transactions, as well as in the European Union 47.3% and the UK 41.6%, while in the markets of developing countries and Japan, the euro looks much more modestly less than 20%. Such proportions can be explained by a closer geographical, historical and cultural connection. This is also the case with the yen, which is most in demand in Japan itself. The situation with the dollar looks different, its share in exchange transactions remains at a high level regardless of the region, ranging from 71.9% in non-Eurozone EU countries to 93% in developing countries. Also important is the fact 

It is also important to note that the share of dollar-euro exchange transactions in the total volume of exchange transactions involving the dollar is 33%, while for the euro it is 70%. From this it follows that the basis of the high share of the euro in the currency exchange market is exchange operations for the dollar-euro pair, while the volume of operations for the exchange of euros for other currencies other than the dollar is about 12% of the total daily volume of foreign exchange transactions in the world. 

World currency market data show that the dollar has a strong position in the world market as the key settlement currency in which international contracts are denominated. The crisis and the intensification of attempts by countries to reduce the use of the US national currency in foreign trade transactions did not significantly affect the change in the share of the dollar in international settlements. 

The US dollar as an international reserve currency The main purpose of the accumulation of foreign exchange reserves is a precaution, the reserves are a safety cushion for the country's economy, the use of which can reduce the potential damage from a sudden onset of the crisis. Foreign exchange reserves are used by central banks in foreign exchange interventions and international settlements, they can also be used as investments in case of a sudden loss of confidence and a sharp outflow of capital from the country. A country whose currency has the status of a reserve currency has certain advantages from this currency status, including the possibility of covering the balance of payments deficit with the national currency, as well as helping to strengthen the position of national corporations in the world market.  


Under the Bretton Woods Agreement of 1944, the dollar was assigned the status of a reserve currency, and after the official abolition of the status of a reserve currency in the mid-1970s. the dollar retained this status in fact. Dollar savings prevail among the resources placed in foreign currency in the 21st century, although there is a tendency to reduce their share. 

The trend towards a reduction in the share of the dollar in the reserves of countries and an increase in the share of other currencies can be traced even before the onset of the crisis and is due to the growth of the economies of other countries, including developing ones. Due to the stable economic growth of the country, its national currency strengthens, which reduces the risk for other countries to keep their reserves in this currency and gives them the opportunity to diversify their reserves. The global financial crisis gave some impetus to this trend, further reducing the share of the dollar and increasing the share of other countries' currencies in reserves placed in foreign currency. In 2009, the dollar's share of central bank reserves saw its biggest quarterly fall since 2002, 2.2% in a single quarter, according to the IMF. 

The crisis led to an increase in the share of the euro in 2009, it increased by 1.3%, however, the financial crisis that began in Europe then reduced the share of the euro by 1.7% below the level of 2006-2007. And although there is a tendency to reduce the share of the dollar in the reserves of countries, its speed, as well as the share of dollar reserves of more than 60%, allow us to expect that in the coming years the priority of the American national currency in reserves placed in foreign currency will continue. 

Alternatives to the dollar as the world's reserve currency
Despite its many shortcomings, the dollar occupies a strong position in world finance also because alternative currencies have a number of even more serious shortcomings. For the euro, which is in second place, the decentralized budget policy is an obstacle in becoming the world's leading currency, the EU budget of approximately 1% of the GNP of the member countries can only be considered as a fund to help the agricultural sector of the EU member states. Also, the eurozone economy is characterized by heterogeneity, various indicators of the socio-economic development of the economy in the bloc countries; decentralization of reserves; social problems, an aging population and inflexible labor markets, as well as more stringent government regulations than in the US, which create additional barriers to investment in the European economy. 

Discussed during the crisis of 2008-2009. the possibility of transforming special drawing rights into a world reserve currency also has no proper grounds: the unbackedness of the currency by the real sector of the economy; the problem of managing the supply of SDRs, as well as the need for a lengthy bureaucratic procedure that precedes the issuance of a currency that is not comparable to the issuance of money in a single country. Another important disadvantage of SDRs is their limited liquidity: the IMF currency is traded only at the official level, at the level of the governments of member countries of the Fund, their central banks and at the level of some international organizations and does not enter the private sector, where almost all world trade and financial transactions take place. 

The currency of the People's Republic of China also has its drawbacks. For internationalization, the Chinese yuan must go through three stages: to become a settlement, then an investment and, only then, a reserve currency, which, according to Chinese experts, seems impossible for the yuan in a closed capital market. Making the yuan the world's reserve currency will require fundamental reforms at home, including the creation of an open capital market and the establishment of a convertible and floating exchange rate; reforming legislation in the sphere of financial market regulation and rejection of indirect methods of regulation; reforming the structure of the Chinese economy: transition from an export-oriented model to an economy focused on domestic demand; 

The high degree of closed economy, the inconvertibility of the currency, even with China's high economic growth rates, repel investors, including the central banks of other countries, from the opportunity to keep their reserves in yuan. In addition, the US is the main importer of Chinese goods, and since the deals are denominated in dollars, the latter will continue to accumulate in Chinese reserves. Given the amount of reserves and the limited investment alternatives, Beijing has no choice but to support the US economy. In the long term, the establishment of the yuan as a reserve currency is seen as a positive moment for the stabilization of the international financial system. 

An analysis of the position of the dollar in world reserves, as well as the shortcomings of alternative currencies, allows us to conclude that in the short and medium term, the dominance of the dollar in the reserves of countries will continue, although the development of world finance will move towards currency diversity in reserves and possibly even towards a multicurrency system. Time will tell what will come of this. 

Investment attractiveness of US government bonds 
When it is said that the US is "printing money" to cover the budget deficit, it means the issuance of government treasury bonds approved by Congress. By buying such bonds, investors lend the US government the missing dollars in the budget for a certain period and at a certain percentage. Demand for issued government bonds abroad is also an important indicator for determining the position of the United States in global finance. 

According to the ECB, most central bank reserve managers view dollar-denominated government bonds as the most liquid asset. According to Chinese expert Guo Shukin, owning US Treasury bonds carries a certain risk, but in a period of instability in the global economy and serious problems in the eurozone, US Treasury bonds, of all not so ideal instruments, remain the best choice in terms of safety and profitability. Therefore, even in a crisis, the demand for US Treasury bonds remains. 

In 2011, cumulative foreign investment in the US economy amounted to $22.8 trillion, of which $4.4 trillion was invested in government treasury bonds. The largest foreign holder of US Treasury bonds - China, despite all the problems of the American economy, is in no hurry to part with US government bonds, and vice versa, increases its stake. According to the US Treasury, in June 2011, China invested $5.7 billion in US Treasury bonds, which increased China's total holdings to $1,166 billion. 

A significant amount of government bonds accumulated by one investor puts the United States in a dependent position in relation to this investor. However, this dependence is bilateral in nature, since, for example, China's attempt to sell a significant portion of dollar obligations in order to reduce losses from the depreciation of the dollar will lead to an even greater drop in their price in the market, which will further increase China's losses. 

Conclusion The economic crisis affected the exchange rates of all currencies, including the dollar, and developing countries stepped up their activities in the financial sector. In view of the growing integration of developing countries into the world economy and world finance, in the future, some reduction in the share of the dollar in various segments of the financial market is possible.  


However, the continued popularity of the US national currency and government bonds is clear evidence of US leadership in global finance. The high degree of use of the dollar by other countries in international transactions and settlements, the widespread use of the dollar as a reserve currency against the background of the shortcomings of alternative currencies give reason to believe that in the medium term the dollar will retain its dominant position in the global economy. 

The dollar will continue to be in high demand in the world, at least until the potential of the American economy with its high share of innovative products and the most developed financial market in the world is exhausted. 

Given the instability of the global economy, the Bank of Russia should prioritize risk minimization rather than making a profit when placing international reserves. In this regard, US Treasury bonds, which have the status of almost risk-free assets and are the base for the pricing of other securities, appear to be a reliable asset for maintaining the reserve funds of the Central Bank. 

To strengthen the positions of the Russian ruble in the world market, it is important to create an effective financial market in the country with a developed infrastructure and institutional structure, increase the capitalization, capacity and depth of the Russian financial market, create effective regulatory and supervisory bodies, expand the number of participants and the list of instruments used in the market . The development of the financial market in Russia, together with a decrease in inflation and the provision of reliable legal protection of foreign capital, will increase the investment attractiveness of the Russian economy and increase the demand for the national currency.