0
$\begingroup$

I am assuming that the weights of currency in the SDR were establishedby following a transparent process. Are these weights the result of a vote or is there a mathematical algorithm/formula that generated the following weights:

U.S. Dollar 41.73
Euro 30.93
Chinese Yuan 10.92
Japanese Yen 8.33
Pound Sterling 8.09 ?

$\endgroup$
1
  • 2
    $\begingroup$ IMF web site: "The SDR basket is reviewed every five years, or earlier if warranted". "During the last review concluded in November 2015, the Board ... approved a new formula—assigning equal shares to the currency issuer’s exports and a composite financial indicator—to determine the weights of currencies in the SDR basket". So it is a formula, but subject to discretionary change ;) imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/… $\endgroup$
    – nbbo2
    Jan 22, 2021 at 21:33

1 Answer 1

3
$\begingroup$

It's a unit of account (for the IMF and other international bodies') purposes. As well as just a basket of the most liquid and transferable currencies that reserve managers will all hold anyway in their normal course of business. It doesn't "move" FX markets.

The measures as I understand them are: = basic liquidity and transferability (which is why there are only 4/5 in the basket in the first place).

  • a country's IMF "quota", ie a country's shareholding in the IMF
  • a country's trade intensity (ie their currency matters from a global trade perspective)
  • a currency's intensity in global capital flows.

The last two reflecting the likelihood that economic changes could generate global capital and FX shifts that would cause FX reserve managers to shift reserve allocations. But the weights themselves are fixed for the 5 year rolling review period, so the SDR doesn't "mark-to-market" in a crisis. The idea is that the currencies included are those with the least chance of an Emerging Market-style currency crisis in the first place!

I'm not sure the precise scorecard is published in full; but its basic purpose is a unit of account rather than a trading instrument. And any counterparty of the IMF who wished to trade it with them, could and does trade exactly what they wanted in real time with the banks, exactly how they wanted, rather than through the SDR basket.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.