DOLLAR AS THE WORLD’S RESERVE CURRENCY - CHALLENGES AND PROSPECTS

Američki dolar je stekao status svetske rezervne valute u bretonvudskom sistemu i zadržao ga do danas. Ovakva pozicija u međunarodnim finansijama ima svoje prednosti i manjkavosti kako za SAD kao emitenta ove valute, tako i za ostatak sveta koji je koristi u trgovini, čuvanju vrednosti i raznim finansijskim operacijama i obračunima. Raspadom bretonvudskog sistema dotadašnji režim fiksnih deviznih kurseva zamenjen je fluktuirajućim deviznim kursevima. Nezavisno do ove promene, dolar je nastavio da igra ulogu svetske rezervne valute. Brojne bankarske i valutne krize posle prelaska na sistem fluktuirajućih deviznih kurseva, kao i preokreti u međunarodnim tokovima kapitala, naveli su zemlje u razvoju i zemlje u tranziciji da povećavaju svoje devizne rezerve. U nastojanju da sačuvaju njihovu vrednost, centralne banke zemalja uglavnom ih plasiraju u državne hartije od vrednosti SAD, kao likvidnu i pouzdanu aktivu. Međutim, zbog rizika koji nosi oslonac na jednu nacionalnu valutu u ulozi svetske rezervne valute, postoje brojni predlozi o reformi međunarodnog monetarnog sistema. Prema tekućim tendencijama u svetu, najozbiljniji kandidati za status svetske rezervne valute u budućnosti su dolar, evro i kineski juan.

In July 1944 delegates from 44 Allied nations gathered in Bretton Woods, US, for the United Nations Monetary and Financial Conference.The delegates signed the Agreement setting up a system of rules, institutions, and procedures to regulate the international monetary system.The planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD).

Introduction
The position of the dollar as the world's reserve currency built in the Bretton Woods era is still ongoing, though somewhat diminished.Some other convertible currencies (e.g.pound sterling, Deutschmark and Japanese yen) have failed to substantially threaten its throne.The position it acquired in international trade has been maintained until today due to the well-established transaction procedures and international payment mechanisms.Its domination in the world's FX reserves has certain downsides for the countries with large amounts of reserves.It turned out that during the crisis the risk of the dollar value fluctuations increases, thereby jeopardizing the value of reserves (their purchasing power).Despite these risks, the maintenance of international liquidity even today depends on available dollar amounts.The banking and currency crises in the global economy, which occurred after the collapse of the Bretton Woods system, along with the uncertainties in terms of capital flows, forced the developing countries and countries in transition to increase their FX reserves.It was believed that higher FX reserves serve as a guarantee that a country can more easily face the difficulties that any disruptions in capital inflows may bring.In the tendency to store the value of their FX reserves, central banks typically invested them into US Treasury securities, as liquid and reliable assets.At the same time, this meant that the dollar was the key currency when it came to the world's FX reserves.It remains so today, despite the fact that the euro has also become the world's reserve currency.The 2008 global financial crisis has fuelled discussions about the necessity of reforming the international monetary system (IMS), bearing in mind that the shortcomings of relying on the dollar as the world's reserve currency were manifested.The risk of dollar depreciation imposed itself as a major problem for countries with the highest FX reserves in the world, first of all, China.Moreover, the high global demand for dollar securities is linked with the increase of the USA budget deficit and current account deficit, which may jeopardize this country's external solvency.This is one of the reasons why new solutions are still being sought for the IMS, including the option of several currencies sharing the role of the world's reserve currency.In the relevant literature there is the opinion that in the foreseeable future the role of the world's reserve currency could be shared by three national currencies: the dollar, the euro, and the Chinese yuan.The subject of this paper's research is the role of the dollar in the IMS and its status of the world's reserve currency.The objective of our analysis is to examine in what degree and in which segments the dollar is still the world's reserve currency, and to assess its prospects in this role.The first part of the paper indicates the tendencies of capital flows as the reason for holding high amounts of FX reserves.The second part refers to the examination of tendencies in respect of the world's FX reserves formation, whereas the third part deals with the role and prospects of the dollar as the world's reserve currency.The fourth part is dedicated to the processes of internationalization of the yuan.

International Capital Flows and the World's FX Reserves
A currency acquires the status of a world's reserve currency if it can perform the basic domestic functions -unit of account, medium of exchange and store of value -at the global level as international money.When foreign entities, first of all central banks, wish to hold their FX reserves in a foreign currency, it means that the concerned currency has the status of a world's reserve currency.Another significant proof that a currency is a world's reserve currency is the fact that it is frequently used in international financial transactions.Today, this role is played by the US dollar and the euro.The international status of the dollar was established by the Bretton Woods monetary system.Before the outbreak of the global financial crisis in 2008, there were some expectations for the euro to overtake the dollar in its role of the world's reserve currency.Today the question is whether the euro will survive as the single Eurozone currency, and the Chinese yuan has been increasingly mentioned as the future rival to the dollar in its role of the world's reserve currency.The growth of global FX reserves following the 1997 Asian financial crisis and the decline of U prvom delu rada se ukazuje na tendencije kretanja kapitala kao razloga za držanje većih iznosa deviznih rezervi.Drugi deo se odnosi na ispitivanje tendencija formiranja svetskih deviznih rezervi, dok se u trećem delu obrađuju uloga i perspektive dolara kao svetske rezervne valute.Četvrti deo je posvećen procesima internacionalizacije juana.
Volatile capital flows can be the reason for increasing FX reserves, given that this generates a possibility for mitigating the consequences of sudden changes in the direction and dynamics of capital movements.International flows of capital, especially assets from banking sources, are substantially affected by domestic financial conditions in the developed countries (Cerutti, Claessens and Ratnovski, 2014, p. 6).The problem of volatile capital flows is particularly prominent in the developing countries with insufficiently developed financial sectors (Dell'Ariccia et al, 2008, p. 4).These countries are facing the issue of how to moderate turbulent capital flows.The solution is neither simple nor single-faceted.One possibility is to anticipate future turbulences and timely undertake appropriate measures to prevent the consequences of sudden shifts in capital flows, and the other is to form a suitable multilateral framework that would contain buffers for the cases of major oscillations in capital flows.Neither of these possibilities simply depends on developing and transition countries, but requires an active role on the part of the developed countries.However, even if developing and transition countries properly assessed which segments of the capital flows demonstrate extreme volatility, the probability of them solving this problem without any coordination with developed countries would be low.Also relevant for solving this problem is the assessment of whether oscillations in capital flows occur as a consequence of global liquidity or the difficulties faced by the countries receiving capital.
International capital flows indicate that the oscillations of capital inflows into developing countries have been increasing in parallel with the liberalization of their capital accounts, thereby increasing the risk for these countries in case of a financial crisis.Up until the outbreak of the Asian financial crisis the net capital inflow in developing countries has been on the rise, hence in 1997 it amounted to 5.1% of their gross domestic product -GDP, but due to the increased risks after this crisis the inflow dropped to 2.7% of GDP in 2000.This was followed by a shift and a growth of capital inflow which reached 7.7% of GDP in 2007, only to be halved due to the global financial crisis, amounting to 3.6% of GDP in 2009 1 .Major oscillations in capital flows in these countries increased the volatility of their currencies' FX rates, which certainly affected the financial and overall macroeconomic stability of developing and transition countries.Oscillatory capital flows even after the 2008 crisis raised the issue of whether it is possible to establish a multilateral regulatory framework for capital flows management, i.e. whether an international coordination of monetary policies is required (Taylor, 2013, p. 15).The request for establishing multilateral control of international capital flows is often stated as an integral element of the IMS reform, and it is frequently indicated to the fact that there has been no powerful empirical evidence about the favorable effects of capital account liberalization (IMF, 2012, p. 6).
The inflow of private capital into developing countries has been revived after the latest crisis, hence in the period from 2010 to 2013 on average it amounted to about 6% of their GDP (World Bank, 2014, p. 96).The inflow of capital in some developing countries in the pre-crisis period ended up in FX reserves, with no additional pressure on the expansion of the current account deficit.However, in other countries, in parallel with the capital inflow the current account deficit did expand.In both cases, external shocks transferred to the countries with foreign debts.The countries with higher balance of trade deficit were facing higher risk exposure due to capital flight.It turned out that countries with a stable inflow of foreign direct investments, a lower net inflow of private capital, and higher FX reserves endured the shock of the 2008 global financial crisis more easily.The dynamic growth of net private capital inflows in the transition countries of Central and Eastern Europe in the period from 2000 to 2007 increased the sensitivity of these monetarnih politika (Taylor, 2013, str. 15).Često se zahtev za uspostavljanje multilateralne kontrole međunarodnog kretanja kapitala navodi kao integralni element reforme MMS-a, a neretko se ukazuje i na činjenicu da nema snažnih empirijskih dokaza o povoljnim efektima liberalizacije računa kapitala (IMF, 2012, str.6).
Uprkos uvreženom stavu da veće devizne rezerve pružaju širi manevarski prostor u slučaju krize, u literaturi su ipak podeljena mišljenja o tome da li su one olakšale ZUT-u udar finansijske krize iz 2008.godine.Rose i Spiegel (2010), na primer, smatraju da devizne rezerve nisu predstavljale glavni zaštitni faktor u vreme finansijske krize, dok Frankel i Saravelos (2012, str.229) dokazuju da su zemlje sa većim deviznim rezervama tokom finansijske krize bile izložene manjim rizicima.Empirijska istraživanja koja su preduzeli Dominguez i ostali (2012), mada sprovedena na manjem uzorku, pokazuju da su nivo deviznih rezervi i njihovo upravljanje tokom globalne countries during the 2008 crisis.Despite the substantial depth and numerous instruments of the financial market, volatile capital flows during the 2008 crisis caused certain problems in the developed countries as well.A particular problem for transition countries lies in the fact that the capital inflow exceeds their absorption capacities, thereby increasing the vulnerability of these countries to capital movements.Net private capital flows in these countries in the period from 2000 to 2010, in relation to their M2 money supply aggregates, were substantially higher than in developed countries (Claessens and Ghosh, 2013, p. 92).Capital inflow in developing countries is affected by both internal and external factors.The World Bank's study, published in Global Economic Prospects: Coping with Policy Normalization in High-Income Countries (World Bank, 2014, p. 100), assessed that the global factors accounted for 60% of capital inflow in developing countries in the period from 2009 to 2013, whereas the remaining 40% was accounted for by domestic factors.Given that developing countries affect external factors only negligibly, there is an unquestionable need for them to create buffers in case of sudden shifts in capital flows.Empirical experiences have also confirmed that developing countries with high FX reserves were in the position to moderate sudden depreciation of their national currencies caused by capital flight by employing FX market interventions.
Despite the deeply rooted belief that higher FX reserves provide more room for maneuver in case of a crisis, the opinions in reference literature are divided as to whether they have actually helped transition countries face the shock of the 2008 financial crisis.Rose and Spiegel (2010), for instance, claim that FX reserves were not a major protection factor during the financial crisis, whereas Frankel and Saravelos (2012, p. 229) have verified that countries with higher FX reserves were exposed to lower risks during the financial crisis.Empirical studies conducted by Dominguez et al. (2012), though on a smaller sample, indicate that the level of FX reserves and their management during the global financial crisis demonstrated a positive correlation with the growth of GDP.These authors have established that FX reserves in transition countries increased up to the point when their GDP started to decline (Dominguez et al, 2012, p. 399).
Volatile capital flows with sudden shifts indicate that the IMS failed to create an environment that would be characterized by macroeconomic and financial stability, thereby supporting the strong and stable economic growth worldwide.Monetary policy in developed countries has often boosted international capital flows, causing sudden leaps and drops in capital inflow, primarily in developing countries.This particularly refers to the US monetary policy, which has been shaping the monetary environment in the most part of the post-war period (World Bank, 2011, p. 133).Frequent banking and currency crises following the disintegration of the Bretton Woods system, in combination with high oscillations in FX rates, had an adverse effect on economic growth.The relevant literature failed to provide powerful evidence that capital account liberalization and financial globalization have a direct positive impact on economic growth in developing countries.Recently, there have been some views claiming that, under certain circumstances, full mobility of capital is even unsolicited, since it increases finansijske krize ispoljili pozitivnu korelaciju sa rastom BDP-a.Ovi autori su utvrdili da su devizne rezerve ZUT rasle sve do tačke kad je njihov BDP počeo da opada (Dominguez i ostali, 2012, str.399).
sensitivity to financial crises (Furceri, Guichard and Rusticelli, 2011, p. 11).Continuous inflow of capital in large amounts causes appreciation of the national currency, with the side effects in the form of lowered export competitiveness, and increased current account deficit.This happened to transition countries in Central and Eastern Europe after the opening of their economies and liberalization of their capital accounts.Although the capital inflow boosts domestic savings and investments, the eruptive inflows and large current account deficits heighten the country's sensitivity in case of a crisis or sudden capital flight.In order to mitigate these risks, countries should conduct macroeconomic policy which in certain cases implies temporary usage of instruments for capital flow management, with a view to maintaining macroeconomic and financial stability.The range of macroeconomic policy measures includes the policy of FX reserves that may alleviate the consequences of a sudden capital flight.Moderating the volatility of capital flows could reduce the needs of developing and transition countries for prudential FX reserves.Most developing and transitions countries have already taken certain steps towards their integration into the global economy, but the 2008 financial crisis encouraged many countries to reinstitute the measures of protection against excessive capital inflows and outflows.It is important for these countries to develop their financial systems that would facilitate intermediation of capital and enable companies easier access to investment finance, i.e. that would make portfolio structuring and management easier for companies and households (IMF, 2012, p. 12).Financial markets of transition countries have been substantially deepened after 2000, yet numerous segments have still remained less elaborate than those in developed industrial countries.Although the deepening of the financial market in transition countries is no guarantee that it will generate higher financial stability, the IMF Report from April 2014 (Global Financial Stability Report Moving from Liquidity -to Growth-Driven Markets) states that there is empirical evidence indicating that a deeper financial market can boost macroeconomic elasticity (IMF, 2014, p. 76).However, the same study offers an observation that deeper financial markets in transition countries may face higher volatility of capital flows, if global investors decide to withdraw from them and continue their operations in the more stable and reliable financial markets of developed countries, where they can expect less intense price shocks (Ibid., p. 76).Evidently, a deeper and more liberalized financial market offers more opportunities for capital to leave the country in case of a deterioration of general circumstances.This generates the impression that transition countries still have the need to hold higher FX reserves that they could use for FX market interventions, thereby preventing excessive FX rate fluctuations in case of sudden shifts in capital flows, at the same time preserving their external liquidity.
The expansive US monetary policy in the past several years (referred to in literature as "quantitative easing"), having recorded almost zero revenues, stimulated the investment of financial capital into countries with higher revenues.Developing and transition countries turned out to be a sound replacement for developed countries, given their higher economic growth rates and stable economic environment.Lim, Mohapatra and Stocker (2014, p. 3) used the econometric model to examine the inflow of capital into developing countries in the period from 2000 to 2013.They determined that 62% of the achieved capital inflow growth, which in the observed period amounted to about 5% for an average developing country, was due to the altered general monetary conditions, whereas at least 13% was due to the additional effect of expansive monetary policy.These results suggest that a change in the course of monetary policy of the US and other developed countries could lead to a sudden halt in capital inflow into developing countries.This is what actually tempts developing and transition countries to continue accumulating their FX reserves, as a safe source of international liquidity in case of any shifts in capital flows.
Table 1 also features the currency structure of allocated FX reserves (section of FX reserves with known currency structure), which suggests that the US dollar is still the dominant currency of the world's FX reserves.The regional distribution of the world's FX reserves indicates that their largest growth has been recorded in Asian countries (primarily in China).Converting considerable amounts of FX reserves into the US Treasury securities, the countries with high FX reserves also strive to prevent the appreciation of national currencies, thereby supporting export competitiveness and economic growth.Although holding FX reserves implies certain opportunity costs, we cannot disregard the probability of developing and transition countries having managed to preserve financial stability upon the outbreak of the 2008 global financial crisis due to their FX reserves.Having increased the FX reserves, transition countries at the same time strengthened the leading role of the dollar in international finance (Prasad, 2014, p. 12).However, major holders of the US Treasury securities are exposed to the risk of dollar depreciation; hence they occasionally voice their disagreement with the US monetary policy.This is the reason behind the recent diversification of FX reserves, with a decreasing share of the dollar.Nevertheless, possibilities for diversification are not that large yet, given that some convertible currencies of developed countries with high rating are insufficiently liquid, which lowers their attractiveness in the formation of FX reserves of developing and transition countries.
The position of FX reserves in the world has increased even when measured based on select macroeconomic parameters: import of goods and services, GDP, and foreign debt (Table 2).The ratio between FX reserves and foreign debt is used as an indirect indicator of how regularly a country would be able to settle its foreign debt liabilities in case of any difficulties in the current FX inflow.In that case the country would rely on its FX reserves.The growth of FX reserves in transition economies and developing countries according to this ratio is impressive, and suggests that total foreign debts of this group of countries are fully covered by their FX reserves.
Uprkos apsolutnom porastu, svetske devizne rezerve još uvek su male ako se posmatra njihov iznos prema ukupnoj aktivi banaka, a skoro da deluju beznačajno kod se njihov iznos uporedi sa ukupnim iznosom emitovanih obveznica i akcija u svetu (Mohan, Debabrata i Kapur, 2013, str.26).Ističući da rast deviznih rezervi nije nadvisio rast ostalih finansijskih instrumenata i tržišta, pomenuti autori smatraju da teze o tome da rast deviznih rezervi predstavlja rizik MMS-a nemaju osnova, i da je njihov rast zapravo posledica stanja u MMS-u, a ne uzrok njegovih manjkavosti.Na istoj liniji zaključivanja su mišljenja po kojima globalne neravnoteže tekućeg računa nemaju mnogo zajedničkog sa krizom (Shin, 2012).Ipak, iskustva kazuju da velike neravnoteže tekućeg računa, koje su često povezane sa pogrešnom alokacijom kapitala, mogu biti jasan predznak buduće finansijske krize (Gagnon, 2014, str. 4).Pre izbijanja krize javnih dugova u evrozoni, deficiti tekućeg računa pet perifernih zemalja su dostigli visok iznos u odnosu na njihov BDP: 14,8% u Grčkoj, 11,4% u Portugalu, 9,8% u Španiji, 5,5% u Irskoj, i 2,1% u Italiji (podaci se odnose na 2007-2008) ( Such a growth assures foreign creditors that the economies of the observed countries are capable of regularly servicing their foreign debt liabilities, thereby increasing their readiness to offer new funds to these countries under more favorable conditions.This indicator is also indirectly relevant for foreign direct investors, who perceive the amount of FX reserves of the host country as guarantee that they will not be facing any problems in the process of repatriation of profits and capital. The proportions of FX reserves growth are also illustrated by their amount put in relation to GDP.The growth of this indicator in developing and transition countries by about 3 times from 2000 to 2013 is considerably larger than in developed countries where, in the same observed period, it amounted to less than two times.The rise of FX reserves in developing and transition countries is owing to their increasingly prudential approach, since it turned out that during a crisis countries with higher FX reserves have more room for maneuver when it comes to maintaining economic growth.According to some earlier estimates, prudential FX reserves account for between one half and two thirds of total FX reserves in the world (Obstfeld et al., 2008, p. 5).
Despite the absolute growth, global FX reserves are still low if their amount is set against the total banks' assets, and they almost seem negligible if compared with the total amount of issued bonds and shares in the world (Mohan, Debabrata and Kapur, 2013, p. 26).Underlining that the FX reserves growth did not exceed the growth of other financial instruments and markets, the concerned authors claim that the theses about the FX reserves growth posing a risk to the IMS are unfounded, and that their growth is actually a consequence of the IMS condition, and not the cause of its shortcomings.Along the same lines of thought are the opinions according to which global current account imbalances do not have much in common with the crisis (Shin, 2012).Nevertheless, experiences have shown that major current account imbalances, often related to the misallocation of capital, may be a clear signal of the future financial crisis (Gagnon, 2014, p. 4).Prior to the public debt crisis in the euro area, current account deficits of five peripheral countries reached high amounts in
Bussiere et al. (2013, p. 34) concluded that the 2008 financial crisis justified the increase of FX reserves, because the countries with higher amounts of FX reserves, as a percentage of short-term debt, were less affected than other countries, ceteris paribus.Capital accounts open to a smaller degree, according to the findings of the above study, amplify these effects.Asian countries, taught by the experiences of the 1997 Asian financial crisis, considerably improved their macroeconomic performance.Enhanced current account balances and higher FX reserves before the outbreak of the 2008 financial crisis are a direct response to the shortage of dollar liquidity during the 1997 Asian crisis (Park, Ramayandi and Shin, p. 138).

Role and Prospects of Dollar in International Finance
A significant characteristic of the global FX reserves growth is the fact that the US dollar is still the key currency in which these reserves are held (Table 2).The reasons for dollar being the world's reserve currency should be sought in the fact that the US economy is still the most powerful in the world, and that the US issues a sufficient volume of dollar-denominated securities, thereby satisfying the increasing global demand.The common assessment in reference literature is that the US Treasury securities market is deep and liquid, enabling investors all over the world to convert these securities into cash quickly and with no risks entailed.The question can be raised whether the dollar today has a sound potential replacement in its role of the world's reserve currency.As a response, it can be emphasized that except for the euro, also backed by a deep and liquid financial market, other currencies are not serious candidates that could challenge the dollar's role of the world's reserve currency.Admittedly, the fate of the euro is uncertain, due to the tensions in Eurozone caused by the public debts of its peripheral member states, and due to the slow and uneven revival of economic growth (Di Mauro and Pappadá, 2014).After euro, the most significant currency at the international financial scene is the British pound.However, bearing in mind that the European Union's economy has been facing difficulties, not even the financial depth of pound-denominated assets would suffice to bring it substantially closer to the role of the world's reserve currency.Neither can the Japanese yen make a considerable breakthrough into the IMS because this country's public debt in relation to its GDP is the highest in the world, discouraging investors from assets denominated in this currency.The Chinese currency, the renminbi, has demonstrated the ambition towards a regional internationalization, but its more important international ascent can be expected in reducing FX controls and deepening the internal financial market, on the one hand, and in strengthening the Chinese economy in the region and worldwide, on the other hand.
Huge global demand for dollar-denominated securities enables the US to sell its T-bonds at a lower interest rate than it would be possible if the global demand for these securities abated.Any potential decline in demand for these securities would probably affect the interest rates on corporate bonds, hence increasing the costs of investment in the US economy.The consequences for the US economy's competitiveness would be immediately felt, which would impact its position in the global market.These are the significant reasons why the US is interested in keeping its currency in the position of the world's reserve currency.Investors believe that the US Treasury securities are highly liquid and very reliable.This is confirmed by the findings of Krishnamurthy and Vissing-Jorgensen (2013, p. 235), stating that the revenues on these securities have been reduced on average by 73 basis points per year in the period from 1926-2008, out of which 46 basis points refer to liquidity and 27 to safety.These authors calculated that the Government in the same period saved about 0.25% of the US GDP per year from interest.
Vodeći svetski holderi američkih državnih HoV strahovali su da bi pad međunarodne vrednosti dolara znatno umanjio realnu kupovnu moć njihovih deviznih rezervi.Ekspanzivna monetarna politika Fed-a, obeležena istorijski niskim kamatnim stopama, i kolebanje vrednosti dolara na svetskim berzama, spadaju u posledice finansijske krize iz 2008.godine.Mada je ovakva politika pomogla američkoj privredi da se oporavi od finansijskog šoka iz 2008.godine, ona je istovremeno povećala mogućnost da akteri u privredi donose pogrešne investicione odluke, dok su niski prinosi državnih HoV podstakli agresivnije investiranje u rizičnije instrumente koji nose višu kamatnu stopu.Usled toga dolazi do pojačane volatilnosti u međunarodnim tokovima kapitala.Uprkos tome, svetska market, with about 60% of international bank deposits and 61% of allocated FX reserves being denominated in dollars (Figure 1).Such a huge presence of the dollar in FX transactions is related to its participation in international trade invoicing, primarily when it comes to trade in oil and other stock exchange products (Goldberg, 2011, p. 5).Each country in the world tends to hold dollar-denominated assets in its FX reserves in order to be safe when it comes to the payment of import of energy raw materials, given that the world trade in these products is, automatically, invoiced in dollars.One could say that dollars are needed to satisfy the unquenchable greed for oil (Schulz, 2009, p. 465).Potential usage of other currencies to invoice oil trade, or an increased role of barter arrangements in this trade, could lower the global demand for dollars.If we bear in mind that a transfer to another currency in the invoicing of international trade in energy raw materials would require all stakeholders to adjust to the new conventions and trading rules, as well as new instruments, it is obvious how demanding and complicated such a shift would be.This explains the inertia in using dollars as the leading currency for international trade invoicing.During the oil crisis in the 1970s there were some attempts to reduce the presence of the dollar in oil trade invoicing, yet with no major success.Many countries, in addition to the US, increase their public debt by issuing dollar-denominated securities.The dollar is also the dominant vehicle currency, used for the purpose of calculating inter-bank international payments (McKinnon, 2009, p. 47).
The presence of dollars on the global capital markets indicates that the global demand for the US Treasury securities is strong, and that it brings their yields below the equilibrium rate of return at the international capital market (IMF, 2010, p. 9).This, in turn, triggers the expansion of the US budget deficit and entails the risk of potential inability of its regular servicing developing into the general distrust of the market in the dollar as store of value.The global financial crisis which originated in 2008 at the US soil caused some uneasiness on the part of major holders of the US Treasury securities (first and foremost, China and Russia).The stakeholders at the global financial markets felt certain apprehension as to what could happen to the dollar FX rate if China begins to sell the US Treasury securities from its FX reserves.Such a scenario would entail the risk of turmoil in international payments, which could undermine the global financial stability and substantially aggravate the recovery of the global economy.This could be interpreted as a contemporary version of the Triffin dilemma, given that the growing demand for international liquidity (with a view to meeting the higher demands of developing and transition countries for FX reserves) lowers the interest rates in the US economy, which triggers the expansion of the US current account deficit and public debt.At some point foreign investors could lose their trust in the US solvency, which might be an introduction into the crash of the dollar (Benassy-Quere and Forouheshfar, 2013, p. 2).Until this happens, the international status of the dollar enables banks and companies from the US to perform international transactions in their currency.They are not exposed to the FX rate risk since they are not forced to convert their currency into other currencies, which cuts the operational costs.
U novije vreme oživele su ideje o supstitucionom računu, preko koga bi se volatility of the dollar value on the world's stock exchanges, are some of the consequences of the 2008 financial crisis.Although such policy has helped the US economy recover from the 2008 financial shock, at the same time it increased the possibility of stakeholders in the economy making wrong investment decisions, while the low revenues on the US Treasury securities stimulated more aggressive investments in riskier instruments bringing higher interest rates.This has intensified the volatility of international capital flows.Nevertheless, the global demand for the US Treasury securities has not subsided.Higher diversification of FX reserves would be possible if there were a suitable replacement for dollar securities in terms of liquidity and safety.The depth of the US Treasury securities market is what particularly attracts investors due to the easy marketability of these financial instruments, which is why a potential replacement for the dollar in its role of the world's reserve currency would have to offer similar possibility.According to its size, this market substantially exceeds the market volumes of government securities in Eurozone and Japan, which is an important characteristics valued by potential investors.Diversity of financial instruments and the considerable depth of the US capital market enable foreign investors to reduce the costs of structuring their portfolio.A wider choice of international financial instruments with similar risks and liquidity as the US Treasury securities could, over time, facilitate the reduction in the volume of global FX reserves in relation to the global GDP.Investments of poorer countries in reserve assets with low interest rates at the same time imply that the excessive savings from investments in those countries spill over into developed countries, thereby generating considerable macroeconomic costs for the countries from which these funds flee.This confirms the assessment that the accumulation of FX reserves as a form of prudence caused by the distrust in the IMS entails substantial costs.Rodrik (2006, p. 2) expresses these costs as a difference between yields on liquid reserve assets and costs of procuring funds at a foreign market, designating them as social costs.Based on this approach, the same author established that these costs for developing countries at the time when he was writing the concerned paper amounted to about 1% per annum.
The risk of holding the US Treasury securities in FX reserves of transition and developing countries with the current account surplus, according to Bayoumi and Ohnsorge (2013, p. 16), could be mitigated if these countries liberalized their capital accounts, thus encouraging its residents to invest abroad to a higher degree.These authors believe that China could stimulate a net outflow of portfolio investments by liberalizing its capital account, thereby alleviating the pressure on the central bank to invest in the US Treasury securities.However, Bayoumi and Ohnsorge (2013, p. 5) remind us that the experiences of other countries show that a capital account liberalization was often accompanied by an FX or banking crisis.In such cases, the crises do not have to occur immediately after the capital account liberalization.These authors (Ibid., p. 5) state the example of Great Britain and Japan, where the banking crises occurred some ten years after the capital account liberalization.
During the financial crisis banks were striving to attract as much dollars as possible from the capital market in replacement for their dollar-denominated securities, which caused a shortage of dollars (McCauley and McGuire, 2009, p. 89).These authors particularly underline that the European banks recorded a powerful expansion at the international capital market, which turned into the accumulation of dollar securities in the amounts higher than their dollar deposits.This difference was compensated through borrowing at the interbank market.The intense demand for dollars contributed to this currency's appreciation in the second half of 2008.According to the assessment of the above authors, the Fed tended to relieve the shortage of dollars by granting loans to the central banks of many countries.Numerous companies in the world whose dollar-denominated debts matured for repayment, faced with the shortage of dollars and its appreciation, procured funds in other currencies at the capital market.The global demand for dollars is a kind of a confirmation of this currency's domination in international finance.
When choosing assets in which to hold their funds, private investors (investment funds, pension funds, insurance companies, etc.) opt for those that are liquid and easily tradable at the financial market.It is not difficult to prove that the US Treasury dollar-denominated securities best fulfil these criteria.
Recently the idea about substitution accounts originated, through which any excess of liquid dollar reserves would be turned into Special Drawing Rights -SDRs (McCauley and Schenk, 2014).Although this idea has been pressuring the reformers of the IMS since the 1970s, there are numerous obstacles to its implementation.Unwillingness of the US to accept the burden of this operation's FX risk is frequently stated as a reason to reject this idea (Farhi et al, 2011, p. 45;Kenen, 2010).Even if this idea were accepted by the IMF, it would take years to achieve the gradual conversion of dollars into SDRs.
If China, as the world's leader according to the amount of FX reserves, mostly denominated in dollars, decided to instantly sell its US Treasury securities, it is highly probable that the dollar would undergo a sudden depreciation.This leads to the conclusion that the countries with high FX reserves invested in dollar securities could affect the dollar's FX rate.This impact on the FX rate does not have to coincide with the trends in the US current account values.It often happens that Asian countries with huge dollar reserves intervene at the FX market, preventing the appreciation of national currencies against the dollar, thereby supporting the growth of export.In that case the US, as the issuer of the reserve currency, plays a passive role in the dollar FX rate policy (Herring, 2012, p. 30).
The status of the dollar as the world's reserve currency is most often observed in relation to the US current account deficit and budget deficit.Such an approach raises the issue of whether the US must record a continuous trade deficit in order for the dollar to keep its status of the world's reserve currency.Bearing in mind that the US recorded a trade surplus in the post-war period, whereas the rest of the world obtained dollar funds through investment flows, we cannot conclude that the increase of the global FX dollar-denominated reserves today implies a trade deficit of the US.However, today it is mostly considered that countries with a current account surplus can increase their FX reserves in their exchange with the US.On the other hand, the US has no trouble financing its continuous trade deficit: it sells its government and corporate debt instruments to the central banks of foreign countries.Thus, the US government, the households and the corporate sector get the possibility to borrow more, at pretty low interest rates.Nevertheless, the excessively low interest rates and less demanding credit terms in the US generate the favorable conditions for the occurrence of asset bubbles, with almost unavoidable consequences for financial stability.The crisis may avert private foreign investors from the intention to invest their funds in the US, but it does not avert foreign central banks from accumulating FX reserves like before the crisis.The powerful demand for dollar-denominated securities enables the US to stimulate its economy with no risk that it would condition a depreciation of the dollar.Borrowing abroad, the US finances its current account deficit and its budget deficit.However, the accumulation of its foreign debt US Federal Reserve (FED) str.50).Tome ide u prilog i makroekonomska stabilnost koja karakteriše kinesku privredu poslednjih nekoliko godina.Značajan napredak je registrovan u izgradnji finansijskog sistema, u kome dominiraju banke.Međutim, tržište kapitala još uvek je nerazvijeno.Dalja finansijska liberalizacija otvorila bi prostor za internacionalizaciju juana, ali bi ujedno povećala rizik preokreta u tokovima kapitala.Stoga izgleda razumljivo što se kineske monetarne vlasti opredeljuju za postepeno ukidanje ograničenja na tokove kapitala (postepena liberalizacija).Mada kontrola kapitala usporava proces internacionalizacije juana, ona umanjuje rizike nagle internacionalizacije valute.Svesni rizika da bi povećana internacionalizacija juana u režimu otvorenih tokova kapitala mogla dovesti do apresijacije ove valute, koja bi destimulisala izvoz zbog gubitka izvozne konkurentnosti, monetarne vlasti Kine ne žure sa liberalizacijom računa kapitala (praktična posledica globalne finansijske integracije je otežana sterilizacija intervencija na deviznom tržištu u cilju stabilizacije deviznog kursa) (Devereux i Yetman, 2014, str.7).Ove okolnosti mogu usporiti ali ne i odložiti liberalizaciju kineske valute u budućnosti.Na to ukazuje i rastuće korišćenje juana u fakturisanju međunarodne trgovine Kine od 2010.godine, ali i brojni regionalni ekonomski i finansijski sporazumi koje je potpisala Kina sa azijskim zemljama.Postepena liberalizacija računa kapitala takođe je otvorila prostor za rast ofšor tržišta juana, naročito u vidu porasta depozita koji glase na juan u Hong Kongu, Kina.Ovi procesi predstavljaju prve korake konvertibilnosti kineske valute.Može se očekivati da će Kina preko ovog finansijskog centra graditi puteve internacionalizacije svoje valute.

Zaključne napomene
Ključna svetska rezervna valuta i dalje je dolar.Ovaj status je stekao u posleratnom periodu i zadržao ga do danas.Njegova hegemonija u fakturisanju međunarodne trgovine i deviznim transakcijama povezana je sa dugogodišnjim korišćenjem ove valute za obračune i plaćanja u svetu.Dominacija dolara u strukturi svetskih deviznih rezervi takođe potvrđuje njegov značaj u ulozi međunarodnog čuvara vrednosti.Dok zemlji emitentu ove valute, SAD, međunarodna uloga dolara donosi značajne koristi, mnoge zemlje sa velikim deviznim rezervama u ovoj valuti se suočavaju Kineska Centralna banka Central Bank of China increases the burden of its servicing in the forthcoming years.Yet, one should bear in mind that these costs are lower than they would be if the dollar were not a reserve currency.Any potential inability to regularly service the public debt could jeopardize the position of the dollar as the world's reserve currency.

Internationalization of Yuan
After the 2008 financial crisis calmed, there was a discrepancy between the growing role of Asia in the global economy and the domination of the dollar in the IMS (Bénassy-Quéré and Pisani-Ferry, 2011).In order to reduce this gap, China has already undertaken significant measures towards the internationalization of the yuan.Some of these measures include the following: exporters can invoice their goods in yuans; the inflow of foreign capital is gradually encouraged (the yuan is used for the calculation of investments via offshore zones); bilateral swap arrangements in yuans are signed with the central banks of major trading partners, which enables the calculation and payment in yuans in their mutual trading transactions.Moreover, there has been an expansion of the range of currencies for which the yuan can be directly exchanged with no intermediation of the dollar.Although many authors believe the internationalization of the yuan is still a distant goal (Prasad and Ye, 2012), the initial steps have been made.The growing role of China in the global economy (based on the dynamic growth of its GDP and the fact that it is the leading world's exporter) opens the possibility for the Chinese yuan to become the leading currency in Asia, and in the long run, even the world's reserve currency.The intensive dependence of China on the export and import of goods and services, along with its diversified commodity exchange with different countries, open the possibility for the yuan to acquire the role of the international medium of exchange (Li, 2014, p. 50).Also beneficial for this goal is the macroeconomic stability characterizing the Chinese economy in the several past years.Substantial progress has been recorded in the development of the financial system, dominated by banks.However, the capital market has still remained undeveloped.Further financial liberalization would generate room for the internationalization of the yuan, but at the same time it would increase the risk of sudden shifts in capital flows.Therefore, it seems reasonable that the Chinese monetary authorities have chosen to gradually abolish capital flows limitations (gradual liberalization).Even though the control of capital slows down the yuan internationalization process, it reduces the risks of sudden internationalization of this currency.Aware of the fact that the intensified internationalization of the yuan within the open capital flows regime poses the risk of this currency's appreciation, which would discourage exports due to the loss of export competitiveness, the Chinese monetary authorities do not want to rush the capital account liberalization (a practical consequence of the global financial integration is an aggravated sterilization of FX market interventions with a view to FX rate stabilization) (Devereux and Yetman, 2014, p. 7).Such circumstances may slow down, but cannot altogether suspend the liberalization of the Chinese currency in the future.This has been indicated by the increasing usage of the yuan in the invoicing of international trade with China since 2010, but also by the numerous regional, economic and financial agreements signed by China with Asian countries.Gradual liberalization of the capital account has also generated room for a growth of the offshore yuan market, especially in terms of the growing yuan-denominated deposits in Hong Kong, China.These processes represent the first steps towards the Chinese currency's convertibility.It may be expected that through this financial centre China will be building roads towards the internationalization of its currency.
significance in the role of the international store of value.Whereas the international role of the dollar brings considerable benefits to the issuer of this currency, i.e. the US, many countries with large FX reserves in this currency face the risks of its value's volatility, especially at the times of crisis.Despite the objections concerning the unfair privileges of the US owing to the key role of the dollar in the IMS and global liquidity, this currency still does not have a sufficiently powerful rival that would replace it in its role of the world's reserve currency.The increase of FX reserves in developing and transition countries mostly transforms into placements of these funds into the US Treasury securities, primarily due to their liquidity and reliability.The growing demand for the US Treasury securities in the world enables the US to cut the costs of financing its increasing budget deficit by lowering the interest rates on these securities.Central banks in the world practically have no alternative for conducting a more intensive currency diversification of their assets, instead being forced to predominant turn to the US Treasury securities (the market of equally good German government securities is not deep enough to compete with the US market).This is what enables the dollar to keep its position of the dominant currency of the world's FX reserves.Although the euro has to some degree become an international currency, the recent public debt crisis in Eurozone put a stop to its ascent to being a world's reserve currency.The requests for a reform of the IMS are mostly justified by statements to the point that the dollar as the national currency is the pillar of international liquidity, which is what causes problems in the form of cyclical crises, any time a shortage of dollars is felt at the global market.Some attempts to put the creation of international liquidity under the control of the IMF and to promote Special Drawing Rights as the world's reserve assets, have stumbled at countless issues related to the practical implementation of this idea.For now it seems more realistic that in the future there could be a reduction of the international role of the dollar in favor of the higher weight of the euro (under the assumption that Eurozone recovers from the present crisis) and the Chinese yuan.However, bearing in mind the difficulties Eurozone is going through, and the fact that the process of gradual internationalization of the yuan is related to the region of Asia, it is highly probably that the dollar will still be the key world's reserve currency in the foreseeable future.
Notes: Allocated FX reserves are the FX reserves with known currency structure.The data in column 3, in brackets, are the ones indicating the share of allocated in total FX reserves.Source: The data from the IMF COFER database were downloaded from: http://www.imf.org/external/np/sta/cofer/eng/cofer.pdf.Accessed on 2 June 2014.

Table 1 .
International reserves per groups of countries

Table 2 .
FX reserves in relation to selected indicators Note: Classification of countries according to the IMF, World Economic Outlook Database.Source: The data on FX reserves are from the IMF database downloaded from: http:// www.imf.org/external/np/sta/cofer/eng/cofer.pdf.Other data downloaded from: http:// www.imf.org/external/pubs/ft/weo/2014/01/.Accessed on 2 June 2014.