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THE EXPLAINER: RICHARD BLACKWELL TAKES QUESTIONS ON THE FINANCIAL CRISIS

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SDRs: The currency nobody uses

RICHARD BLACKWELL
The Globe and Mail
April 1, 2009

A recent article mentioned that China was interested in holding its foreign currency reserves in SDRs instead of U.S. dollars. What are SDRs?

SDR is short for Special Drawing Right. It is essentially an artificial currency made up of a specific proportion of U.S. dollars, Japanese yen, British pounds and European euros.

The SDR was invented by the International Monetary Fund in the late 1960s to allow countries to hold their official reserves in something other than gold or U.S. dollars. The value was initially set as equal to 0.888671 grams of fine gold, which was the same value as the U.S. dollar at the time.

When the gold standard was eliminated in the early 1970s, the value of an SDR was set to be equal to a basket of 16 currencies. This was later reduced to five and then four currencies.

Over time, SDRs fell out of favour as a reserve currency, and most countries ended up holding most of their foreign reserves in U.S. dollars. The SDR is now used mainly as the unit of measure for the IMFs assets.

What is an SDR actually worth now?

The composition of the SDR is reviewed every five years, when the weightings between the currencies are adjusted depending on their importance in world trade and finance. The last adjustment was in 2005; the next is set for 2010.

The day-to-day value of an SDR depends on the fluctuations of each currency.

An SDR is now worth about €0.41 plus ¥18.4 plus £0.09 plus $0.63 dollars. That totals about $1.50 (U.S.) at current exchange rates.



http://www.theglobeandmail.com/servlet/story/LAC.20090401.REXPLAINER01/TPStory/Business


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