As central bankers grow increasingly concerned about the volatility of the US dollar, the European Union looks ready to back a plan that could help buffer countries against swings in US exchange rates.
At a meeting today (17 February) in Paris, finance ministers preparing for the G20 reunion later this year will consider adding the Chinese yuan to a basket of reserve currencies to rival the dominance of the dollar, according to an internal paper seen by EurActiv.
‘Special Drawing Rights’, as they are known, are comprised of a fixed amount of widely traded currencies, including the dollar, but also the Japanese yen, the British pound and the euro. They are traded through the International Monetary Fund.
The economic argument for using Special Drawing Rights (SDRs) as currency reserves is that they could give countries a more stable financial position because they are based on a pool of currencies and therefore less likely to be affected by fluctuations in the US economy. By exchanging US dollars for SDRs, for example, governments can help insulate their foreign reserves from declining US interest rates.
The EU appears to be following the lead of International Monetary Fund (IMF) Chief Dominique Strauss Kahn, who last week endorsed including the Chinese yuan in the SDR basket to stabilise the global system and to reduce the dominance of the dollar as a reserve currency.
“Over time, there may also be a role for the SDR to contribute to a more stable international monetary system,” Kahn said.
The EU paper said it would explore whether “a limited number of currencies” of important countries could be added to the basket “to reflect global economic realities”.
French President Nicolas Sarkozy is the EU’s most vocal supporter of adding the yuan and currently holds the presidency of this year’s G20 rounds.
Russian President Dmitry Medvedev said the currencies of the developing nations of Brazil, Russia, India and China should be included, while US President Barack Obama’s administration said it could support an expansion “over time”.
SDRs have been a controversial subject since their creation in 1969, but in recent years have won the support of emerging economies like China, which hold trillions of dollars in its foreign exchange reserves.