Last week, SDR became the latest addition to the growing list of
forex acronyms. So-called Special Drawing Rights are a unit of account
used by the IMF, “defined as
the value of a fixed amount of yen, dollars, pounds and euros,
expressed in dollars at the current exchange rate. The composition of
the basket is altered every five years to reflect changes in the
importance of different currencies in the world’s trading system.”
The sudden rise to popularity of SDRs (in spite of their 40 year
history) can be attributed both to developing countries’ growing unease
about the status of the Dollar, as well as to their perceived usefulness
as a tool in fending off economic depression. Ignoring the latter- for
the purpose of this post- let’s look, at how SDRs will impact the role
of the Dollar as the world’s reserve currency.
First of all, as I noted in Tuesday’s post,
the success/scope of the SDR program depends on the positions of the US
and EU, the largest and most important members. In the case of the US,
the most recent SDR expansion (1997) was never implemented because the
US blocked it. Neither can the support of the EU be taken for granted.
According to one member of the European Central Bank, “There was no examination
of whether there is a global need for additional liquidity at all… One
used to take a lot of time to examine something like this.”
In addition, it’s not clear what benefits the synthetic currency would yield. Asks one commentator: “What is one to tie it to?…in
a world of depleting resources it is difficult to fathom how to create a
list of constituents which would not constrain global growth and tie us
into many years of deflation.” In other words, given that the SDRs will
derive their value from underlying currencies, it doesn’t seem like the
end result would be anymore stable than the current system.
China, meanwhile, has showed fervent support for the expansion in the form of a $40 Billion pledge,
which is not surprising since a report issued by the head of its
Central Bank provided some of the impetus. This $40 Billion is
tantamount to an exchange of Dollars for a basket of currencies. The
benefit to China is articulated by one analyst as follows: “ ‘We could
see the IMF being put in a position where it could raise in the capital
markets funds in SDR-denominated debt….The debt could be used ‘by China
and other central banks to be put into their currency reserves, at the expense of the U.S. dollar.’ “
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