And The IMF Proposes Replacing The Dollar. Fund Currency Gains Followers

According to IMF representatives, their currency would stabilize the global financial system, a view shared even by some economists who say that SDR is less volatile, writes CNN Money.

Dominique Strauss-Kahn, IMF director, admits there are some technical hurdles in terms of SDR, but is convinced that it can correct global imbalances. The aim should be that central banks have reserves to better reflect the global economy since the dollar is vulnerable and affected the U.S. economy and the changes made in Washington.

Besides the introduction of a reserve currency, the IMF proposed bond and create their own central banks to reduce reliance on U.S. securities.

Moreover, the same money could be used for trading oil or gold. IMF representatives explained that oil price increases when the dollar depreciates, so use SDR’s to prevent exploitation of oil rises in energy that occurs when the dollar is going through a worse period.

The first step would be for Member States to create IMF SDRs worth $ 2 trillion over the next few years, says Fred Bergsten, director of the Peterson Institute for International Economics.

And Europeans will expand the role of IMF money

The report presented by the IMF will be discussed at a global financial leaders of the G20 conference next week. They will try to establish what other currencies should be placed in the SDR basket which form, among them being the Chinese yuan Canadian dollar. They also will study the possibility to use broad range of assets held in currency the IMF.

And French President Nicholas Sarkozy, who chaired a meeting of the G20 earlier this year said he wanted to expand the role of the SDR and include in it and the yuan to provide more stability in the international monetary system and to encourage China to strengthen its currency. Also, the French want to reduce country’s dependence on the dollar, according to the Wall Street Journal.

The IMF has already added in recent years amounting to SDR 250 million dollars in reserve to loans meant it was a pretty small step, in the opinion of the Deputy Director of the Fund, John Lipsky. He now says that the IMF and the G20 countries will need to determine whether to increase liquidity through new allocations of SDRs. Also going to look for and ways to make the Fund more attractive currency for investors and private markets after economists have argued that transactions in SDRs have higher costs that discourage the widespread use of currency.

“It will not change the world tomorrow, but is a potential step toward a more stable multilateral system,” said Lipsky.

Replacing the dollar, decades-old idea

Replacing the dollar as the currency of reference is discussed more seriously by central banks in the world, nearly two-thirds of the world’s currency is currently kept in U.S. currency.

Even UN experts declared last year that the dollar has become too unstable to even maintain the value and central banks were advised not to depend on a single currency and to diversify its foreign reserves.

The idea is not, however, new. The great British economist John Maynard Keynes argued decades ago that requires a global and independent central bank to have its own currency and the currency of the IMF was created in 1969 specifically for this purpose. However, it failed to gain much credit for SDR just depends on the evolution of four monde (dollar, yen, euro and sterling).

Lately, the dollar appreciated slightly against the euro, but in the last eight years has lost more than a quarter of its value. This worries that emerging economies have invested large sums in certificates issued by the U.S. Treasury. Also, bonds and interest rates are near zero, which has led many banks to cut their dollar reserves and turn their attention to other currencies such as the Canadian and Australian dollar.