A new global reserve currency?

Dominque Straus-Kahn, the managing director of the IMF, has signaled the recommendation of a new global currency. Member countries hold with the IMF reserves that are referred to as Special Drawing Rights (SDR). His intention is the SDR could act as an alternative to the US$ in central banks’ foreign currency reserves.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to SDR 204 billion (equivalent to about $308 billion, converted using the rate of August 31, 2010). SDR’s are based on a basket of currencies – US$, £, €, ¥ – and should be broadened to include the Chinese Yuan.

Using the SDR would act as a safeguard from exchange rate volatility while issuing SDR-denominated bonds could create a potentially new class of reserve assets.

International policy makers have become increasingly concerned about the threat of currency wars. This is where governments have been trying to reduce the value of their currency to increase the competitiveness of their exports and claw its way out of recession.

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