Will the Dollar Step Aside for SDRs?

The dollar may soon be ousted from its position as the reserve currency of the world if and when a new IMF proposal comes into force. A recent report from the International Monetary Fund discusses the use of Special Drawing Rights as substitutes for the ubiquitous dollar. The reasons for this proposal to replace the USD are many.

Even as the economies across the world begin to gear up once more post recession, the dollar continues to lose ground. This disappointing trend appears to be a huge factor in the IMF’s proposal to replace this currency with a more stable offering.

Although the beginning weeks of this year promised a good start for the dollar, the currency appears to have lost momentum in early February. When compared with the USD, other international currencies have been steadily moving up in value.

There is still considerable volatility in currency values and this has made it difficult to say with certainty what the final fate of the dollar will be. In this week’s statement, Fed Chairman Ben Bernanke stated that the upturn in the economy has not yet eliminated the poor employment rate in the U.S.

On a more positive note, inflation is still under control. The Federal Reserve is clearly going to be hard pressed to maintain low inflation levels while taking all necessary steps to boost employment. Given this, the future path that the dollar may take is still quite unpredictable, and this fact has lead some economists into stating that replacing this currency with SDRs is the best course of action.

Meanwhile, the Managing Director of the IMF, Dominique Strauss-Kahn, maintained a cautionary stance as he spoke of ‘technical hurdles’ that will need to be overcome before SDRs can be used to take over the dollar’s title as world currency. However, he also reiterated that such substitution will go a long way in strengthening the global financial system and in avoiding imbalances.

The greatest advantage offered by SDRs is that they can be exchanged easily into any international currency. The IMF will make a basket of international currencies available at exchange rates determined according to a predetermined system of weightage.

It may be noted that SDRs are a form of representative currency and should not be considered tangible currency in their own right. Any loans made by the IMF are disbursed in SDRs rather than in the currency of that country. Given that SDR presents a more accurate picture of the value of global currencies as a whole, IMF officials believe that, unlike the dollar, this ‘currency’ will be less prone to volatility when U.S. markets fluctuate or U.S. policies change.

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