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measure of a nation's reserve assets in the international monetary system; known informally as "paper gold." First issued by the International Monetary Fund (IMF) in 1970, SDRs are designed to supplement the reserves of gold and convertible currencies (or hard currencies) used to maintain stability in the foreign exchange market. For example, if the U.S. Treasury sees that the British pound's value has fallen precipitously in relation to the dollar, it can use its store of SDRs to buy excess pounds on the foreign exchange market, thereby raising the value of the remaining supply of pounds.
This neutral unit of account was made necessary by the rapid growth in world trade during the 1960s. International monetary officials feared that the supply of the two principal reserve assets- gold and U.S. dollars-would fall short of demand, causing the value of the U.S. currency to rise disproportionately in relation to other reserve assets. (At the time SDRs were introduced, the price of gold was fixed at about $35 per ounce.)
The IMF allocates to each of its more than 140 member countries an amount of SDRs proportional to its predetermined quota in the fund, which in turn is based on its Gross National Product (GNP) . Each member agrees to back its SDRs with the full faith and credit of its government, and to accept them in exchange for gold or convertible currencies.
Originally, the value of one SDR was fixed at one dollar and at the dollar equivalent of other key currencies on January 1, 1970. As world governments adopted the current system of floating exchange rates , the SDR's value fluctuated relative to the "basket" of major currencies. Increasing reliance on SDRs in settling international accounts coincided with a decline in the importance of gold as a reserve asset.
Because of its inherent equilibrium relative to any one currency, the SDR has been used to denominate or calculate the value of private contracts, international treaties, and securities on the eurobond market.See also Euro
type of international money created by the International Monetary Fund (IMF) and allocated to its member nations. Although SDRs are only accounting entries, and are not backed by paper money or precious metal, they are an international reserve asset. The SDR is made up from a basket of major currencies; the dollar value of SDRs is computed daily by multiplying these currencies by their dollar exchange rate in London, and adding (U.S.) $.54. A nation that has a balance of payments deficit can use SDRs, subject to certain International Monetary Fund (IMF) conditions, to settle debts to another nation or to the IMF.
part of a nation's reserve assets in the international monetary system; known informally as paper gold. First issued by the International Monetary Fund (IMF) in 1970, SDRs are designed to supplement the reserves of gold and convertible currencies, or hard currencies, used to maintain stability in the foreign exchange market.
Copyright c 2006, 2000, 1997, 1993, 1990 by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.
Copyright © 2007, 2000, 1997, 1987, by Barron's Educational Series, Inc. Reprinted by arrangement with Publisher.