Reacting to worldwide currency instability, a report released by the United Nations Department of Economic and Social Affairs argues, that “the dollar is an unreliable international currency and should be replaced by a more stable system.”
The use of the dollar for international trade came under increasing scrutiny when the U.S. economy fell into recession. “The dollar has proved not to be a stable store of value, which is a requisite for a stable reserve currency,” the report said.
Many countries, in Asia in particular, have been building up massive dollar reserves. As a result, those countries’ currencies have become undervalued, decreasing their ability to import goods from abroad.
Since 2008, the value of the U.S. dollar has arguably been propped up by its continued status as the world reserve currency. As a replacement standard, The World Economic and Social Survey 2010 supports the International Monetary Fund’s proposal fora standardized international system for liquidity transfer. This would mark a reinvigorated return of Special Drawer’s Rights or SDRs:
The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets—gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.
However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.
The SDR is neither a currency, nor a claim on the IMF. Rather, 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. In addition to its role as a supplementary reserve asset, the SDR, serves as the unit of account of the IMF and some other international organizations.
This revisits a controversy from March 2009 when People’s Bank of China Gov. Zhou Xiaochuan called for a new international reserve currency to replace the dollar:
Zhou suggested that the International Monetary Fund’s Special Drawing Right (SDR) should be given a greater role. Read more on the Chinese currency proposal.
Speaking at the Council on Foreign Relations in New York, Geithner said that Zhou was “a sensible man” and that “everything he said deserves consideration.”
The dollar fell sharply on confusion about Geithner’s comments regarding SDRs. The Treasury secretary subsequently clarified his comments [Editor's Note: In March 2009, Geithner said that the dollar remains the main global reserve currency and that he doesn't see a change in that status in the foreseeable future].
Meg Browne of Browne Brothers Harriman said that the market had “blown [Geithner's remarks] way out of proportion.”
“[President] Obama has said that there’s no need for another reserve currency,” Browne said. “To use the SDR as a new reserve currency is really a stretch.”
Fast forward to July 2010 and the world economic crisis continues and threatens to intensify. With many predicting the crash of the Euro, how can there be any credibility in an aggregate currency when the price of all world currencies is continuously falling . This is especially evident as gold regularly pushes its all-time high. Lastly, will the aggregated value of the SDRs be nothing more than a cover-up of the impending blowup of the $600 trillion derivative bubble?