IMF Pushes for Alternative to US Dollar as Reserve Currency

Friday, 11 Feb 2011 09:32 AM

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The world should consider a new reserve currency other than the U.S. dollar, according to an International Monetary Fund (IMF) report.

For decades, the IMF has helped countries out of crises through its loans, which are denominated not in any one currency but rather in what are known as Special Drawing Rights (SDR), which are claims to many different currencies. For example, a country can draw down from an IMF loan in dollars, euros or any other currency in the basket that the nation in question sees fit.

Some at the IMF say SDRs shouldn't be used just in emergency situations that they are today.

"Over time, there may also be a role for the SDR to contribute to a more stable international monetary system," says IMF managing director Dominique Strauss-Kahn, according to CNN.

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Dominique Strauss-Kahn
The goal is to have a reserve asset for central banks that better reflects the global economy since the dollar is vulnerable to swings and changes in U.S. policy.

The IMF is also considering issuing bonds denominated in SDRs in order to lower global dependency on U.S. Treasurys, although fund officials admit replacing the dollar with another reserve currency is a long way off.

Many countries are heavily invested in U.S. Treasurys, China in particular.

China's economy is dependent on exports to the U.S. and investing here helps fuel demand for those goods.

Chinese officials have expressed concern over U.S. deficits but still say they will keep their money here due to the size and liquidity of the market.

"There is little choice but to invest a large portion of foreign reserves in U.S. dollars and Treasurys," says Wang Jianxi , chief risk officer at China Investment Corporation, which manages $300 billion, according to The Economic Times.

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