The overall strength of the country’s currency is created through a long development, consisting of several stages, which are ultimately reflected in the dominance of the currency. The first stage is education, followed in order by ingenuity and the development of innovative technologies, the competitiveness of goods and services in world markets, large-scale economic production, the conquest of a significant share of world trade, the development of military affairs. power and military bases abroad, the establishment of a strong financial system with strong capital markets and currency dominance.

The US dollar is the most widely used currency that countries use as a reserve currency, not because the US forces them to use it, but because the US has the deepest and most flexible financial markets, the clearest and most transparent corporate governance, the least distinction between indigenous residents and foreigners and have a free and democratic system of government in their country. That is, they have the strength to provide as many dollars as other countries ask them to, so that the dollar does not rise in price much. For another currency to compete with the US dollar, its domestic economy had to develop all of the above characteristics.

Today, the main reserve currency is the US dollar at 58.38%, followed by the euro at 20.48%, the yen at 5.50%, the British pound at 4.94%, the yuan at 2.69%, etc. and etc. Over the past 20 years, the use of the dollar as a reserve currency has declined from about 70% to 58.38%. The reduction came at a time when reserve adequacy was improving. This does not indicate a lack of confidence in the dollar. It simply means that central banks have more options. For example, China began to reduce the share of foreign exchange reserves in dollars since 2005, and since 2013, investments in the Silk Road have allowed China to diversify its reserves in many countries of the world. Saudi Arabia and other countries are doing something similar.

New countries are constantly emerging that are trying to get around the dollar, for example, recently the BRICS countries (Brazil, Russia, India, China and South Africa), in search of an alternative currency. There are no special binding relations or associations between the BRICS countries. Russia, South Africa and Brazil are very small economies, ahead of China and India. Obviously, India would not want to give monetary powers to China, as they do not have such a good relationship. Of these countries, only China matters in terms of what it can actually do with its currency. China accounts for 72% of BRICS GDP, 80% of BRICS growth and generates most of the trade surplus.

Countries like China invest their trade surpluses in reserve currencies and other assets outside of China because if they let the surplus flow to their residents, their currency will rise in price, the residents will have more purchasing power, so they will increase their imports of goods. and their trade surplus will decrease. decline. Further shrinking of the trade surplus will come from the appreciation of the yuan as China’s exports become more expensive. Moreover, a reduction in the trade surplus will occur when other countries stop importing from China in search of other, cheaper markets (eg Vietnam, Bangladesh, etc.).

If China accumulates large euro reserves instead of US dollar reserves, the euro will appreciate, which will lead to a reduction in exports from the EU. because of the expensive euro. To avoid the appreciation of the euro, the EU will have to accumulate dollars to balance the demand for the euro from China.

This means that dollars that China does not buy will be bought by the EU, so dollars that China does not buy will be bought by the EU. In addition, China cannot make its currency a reserve currency and play the role of the dollar, because for this China must allow people to freely trade yuan. Now China doesn’t allow it to float freely because it wants its currency to be undervalued to make its exports cheaper.

Currently, China has a dual currency system to regulate the exchange rate of its money and maintain control over foreign investment. The Chinese Yuan is used for domestic transactions in Mainland China, while the Chinese Yuan is used for international transactions outside of Mainland China. This dual currency system allows China to prevent foreign investors from transferring money to China and Chinese citizens from investing their money abroad.

It is clear that China does not want to give up any capital controls to become a reserve currency, even for the BRICS countries. The common BRICS currency will be seriously flawed due to the fact that all participating countries, due to trade surpluses, must invest in other reserve currencies. By trying to challenge the US dollar, the BRICS members will only increase their already significant dependence on China.

Most countries protesting dollar dominance have capital controls in place that are designed both to prevent foreigners from buying their bonds and to prevent capital from fleeing their country.

The fight against the dollar is part of a cross-cultural rivalry between illiberal governments and liberal democracies that are increasingly colluding against the “West” on various issues in order to extend authoritarian systems of government to other countries.

Mr. Giorgos Atsalakis is an Economist and Associate Professor at the Laboratory for Data Analysis and Forecasting at the Technical University of Crete.