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Special Drawing Rights (SDRs) were a part of the monetary system that was created post World War-2 in the Bretton Woods arrangement. Since the United States had almost all of the gold reserves of the world at that time, the Special Drawing Rights (SDRs) were intended as a supra-national currency that could be used instead of gold, thereby reducing dependence on gold.
However, the idea of an abstract currency replacing gold has not caught up with the world till date. The Special Drawing Rights (SDRs) were virtually unheard of till the year 1968 and are still not very popular. The average person who is not connected to the Forex markets is not even aware of the existence of Special Drawing Rights (SDRs)!
The Special Drawing Rights (SDRs) are basically a combination (weighted average) of multiple currencies. This means that the International Monetary Fund (IMF) has its own reserve which has multiple currencies. Based on the value of these reserves, the IMF creates and distributes Special Drawing Rights (SDRs).
Each unit of Special Drawing Rights (SDRs) consists of 4 major currencies. The Special Drawing Rights (SDRs) derives 44% of its value from the United States Dollar, 34% from the Euro, 11% from the Japanese Yen and 11% from the Pound Sterling.
Since the Special Drawing Rights (SDRs) is nothing but a weighted average of multiple currencies, the interest rate due on the Special Drawing Rights (SDRs) is also nothing but a weighted average of all the currencies.
In the recent past, there have been rumors that countries like China and Russia are urging the International Monetary Fund to move away from the United States dollar based system. These rumors suggest that these countries propose that Special Drawing Rights (SDRs) become the de-facto reserve currency of the world.
One possible reason could be the fact that countries like China are fully aware of the fragile economic condition on which the United States economy stands. Also, China is forced to buy more and more United States treasury debt if it wants to keep its own economy afloat.
Hence, if an Special Drawing Rights (SDRs) based system was implemented, China and many other countries could exchange the excess dollars that they have with a basket of currencies. True, they would still end up with 44% dollars again! However, that would still be a better scenario than being 100% dependent on the United States economy as being a store of value.
Whether a Special Drawing Rights (SDRs) based system will replace the current dollar based system is yet to be known. However, there are some benefits if such a system does get implemented. The benefits are as follows:
The implementation of Special Drawing Rights (SDRs) in place of dollar based system will also lead to certain issues. Some of them have been mentioned below:
The fact that all other economic parameters are extremely sensitive to changes in money supply, this is a dangerous situation to be in.
Critics are of the opinion that it is highly unlikely that the Special Drawing Rights (SDRs) may ever replace the dollar. However, as a student of Foreign Exchange, it is essential that one knows that such a concept exists!
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