What are the Special Drawing Rights (SDR)?

What are the Special Drawing Rights (SDR)?

What are the special drawing rights? Definition and origin

Analysts agreed that the devaluation of the yuan last week with two goals , one favoring exports from China abaratándolas, the other, by subjecting the yuan to the laws of the market to set the exchange rate circumventing state intervention is paving the way for the yuan is part of the basket of currencies in which the value of Special Drawing Rights, SDR is based.

According to the IMF’s Special Drawing Rights (SDR) it is an international reserve asset created in 1969 to supplement the official reserves of member countries. SDRs can be exchanged for freely usable currencies.

Until 17 March 2015 they had been created and assigned to member countries amounting to SDR 204.000 million (equivalent to approximately 280,000 million).

The role of Special Drawing Rights (SDRs)

The Special Drawing Rights ( SDRs) were created to support the fixed exchange rate system of Bretton Woods. The countries participating in this system needed official reserves that could be used to purchase the domestic currency in foreign exchange markets in order to maintain its parity, but the international supply of the two active key reserve, gold and the dollar was insufficient to support the expansion of world trade and financial development. The international community decided to create a new international reserve asset under the auspices of the IMF.

A few years after the creation of Special Drawing Rights (SDRs) , the Bretton Woods system collapsed and the major currencies shifted to a floating rate regime change. In addition, the growth of international capital markets facilitated borrowing by creditworthy governments. Both phenomena reduced the need for the Special Drawing Rights (SDRs) until the outbreak of the crisis and since 2009 has played a crucial role in providing liquidity to the global economic system.

The Special Drawing Right (SDR) is an active potential against the freely usable currencies of member countries of the International Monetary Fund (IMF) . Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways :

:: the conclusion of voluntary exchange agreements between member countries and

:: the designation by IMF member countries with strong external positions to purchase SDRs from members with a situation shaky.

The currency basket that determines the value of the Special Drawing Right (SDR):

Initially, the value of Special Drawing Right (SDR) was defined as equivalent to 0.888671 grams of fine gold value, which then was also equivalent to one dollar. After collapse of the Bretton Woods system in 1973, the Special Drawing Right (SDR) was redefined based on a basket of currencies which is currently composed of the dollar, the euro, the pound and the yen. The value of Special Drawing Right (SDR) in dollars is determined daily and is published on the IMF website.

The composition of the basket is subject to review every five years , or earlier if circumstances warrant, to ensure that it reflects the relative importance of currencies in the global trading and financial systems.

In October 2011, the IMF considered possible options to expand the currency basket of Special Drawing Right (SDR) but ruled out making changes . The next review is scheduled to take place before the end of 2015 but the commission has recommended that studies extend the current basket until September 2016 so it is very likely that the inclusion of the yuan is not raised until then.

When this yuan happen will be a fully convertible currency which will allow many of the contracts of international transactions are denominated in the Chinese currency, which is very important, the yuan will become a reserve currency in competition with the dollar .

Economist and historian Barry Eichengreen, in his book “Exorbitant Privilege: The Rise and Fall of the Dollar”, recalls that in 1924, eleven years after the creation of the US Federal Reserve, the dollar had moved to the pound as currency world reserve. The euro has tried the same thing against the dollar and has failed but very partially . The question that economists do now is whether it will achieve the yuan and when. Inclusion in the basket of currencies that determine the value of Special Drawing Rights (SDRs) would be the first step.

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