Dear CIGAs,
The Noise on Special Drawing Rights is getting so loud that you might as well anticipate this call for inaction will result in a displacement of the dollar for all the same reasons it was first called for and then all but abandoned.
You could take comfort if some previous action was embarked upon again that had succeeded. The SDR has been kept alive so as not to have to admit that the use of an INDEX much like the USDX can actually be considered a currency for reserve that it is clearly not.
It failed miserably in 1970 after much fanfare and will fail again after much Gobbles type fanfare. It is however a most incriminating declaration on the fundamental weakness of the US dollar and the clear desire by other nation to diversify by any means possible away from the US dollar.
Just as its adoption in 1969 to end a dollar crisis actually began a long term dollar fall, so will this introduction after the spin does exactly the same thing.
It was junk then and it is junk now
The IMF system of parity (pegged) exchange rates » The end of pegged exchange rates » The crisis of the dollar
The monetary system established by the IMF in 1944 underwent profound changes in the 1970s. This system had assumed that the dollar was the strongest currency in the world because the United States was the strongest economic power. Other countries were expected to have difficulty from time to time in stabilizing their exchange rates and would need assistance in the form of credits from the IMF, but the dollar was expected to remain stable enough to function as a substitute for gold in international transactions. In the second half of the 1960s these assumptions came into question. The war in Vietnam led to inflation. The flood of dollars into other countries caused difficulty for the European central banks, which were forced to increase their dollar holdings in order to maintain their currencies at the established exchange rates. As the flood continued in 1971, the West German and Dutch governments decided to let their currencies float—that is, to let their exchange rates fluctuate beyond their assigned parities. Austria and Switzerland revalued their currencies upward in relation to the dollar. These measures helped for a time, but in August the outflow of dollars resumed. On August 15 Pres. Richard M. Nixon suspended the U.S. commitment made in 1934 to convert dollars into gold, effectively ending the postwar monetary system established by the IMF. Most of the major trading countries decided to abandon fixed exchange rates temporarily and let their currencies find their own values in relation to the dollar.
The appeal of the IMF’s Special Drawing Rights
Tue Mar 24, 2009 4:49am EDT
March 24 (Reuters) – Large emerging economic powers are pushing for an overhaul of the global monetary system to dislodge the dollar as the dominant reserve currency.
China said on Monday the Special Drawing Rights (SDR) allocated by the International Monetary Fund (IMF) should be used more widely in place of the dollar. [ID:nPEK18458]
Last week, Russia said it would put forward a proposal for the creation of a new reserve currency issued by international financial institutions at the Group of 20 meeting in April. [ID:nLG32185]
Moscow said it has the support of other emerging market countries, including Brazil, South Korea and South Africa for its proposal. [ID:nLJ936330]
OVERVIEW
The SDR is an international reserve asset allocated to member countries in proportion to their IMF quotas, which generate most of the Fund’s resources and determine a member’s voting power in the Fund. The SDR’s value is based on a basket of international currencies made up of the dollar, euro, Japanese yen and British pound.
THEN AND NOW
The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in the system needed official reserves — gold and widely accepted foreign currencies — that could be used to purchase the domestic currency in world foreign exchange markets, as required to maintain its exchange rate. But the global supply of gold and the U.S. dollar wasn’t enough to support the expansion of world trade and financial development. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF called the SDR.
A few years later, the Bretton Woods system collapsed and major currencies shifted to a floating exchange rate system regime. In addition, the growth in world capital markets facilitated borrowing by credit-worthy governments. Both of these developments lessened the need for SDRs.
Today the SDR has only limited use as a reserve asset and its main function is to serve as the unit of account of the IMF and some other international organisations.
NOT A CURRENCY
The SDR is not a currency. It is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.
HOW IS THE SDR VALUED
The U.S. dollar-value of the SDR is posted daily here. It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.
SDR ADVANTAGES
Some international economists argue that creating a truly global reserve currency, through a new SDR allocation, would be a quick way to help credit-starved emerging and developing countries boost spending.
China argues that allocating more SDRs would give the IMF more resources and help it address imbalances in voting power within the IMF, which has long been dominated by the United States and Europe.
(Source: International Monetary Fund) (Reporting by Lesley Wroughton; editing by Stephen Nisbet)