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Creating a new reserve currency

There is a growing buzz over the possibility that the IMF will create a new global reserve currency based on special-drawing rights (SDRs) to replace the US dollar.

Bloomberg reports on the proposed new reserve currency:

"The International Monetary Fund said it’s possible to take the “revolutionary” step of creating a new global reserve currency to replace the dollar over time.

The IMF’s so-called special drawing rights could be used as the basis for a new currency, First Deputy Managing Director John Lipsky told a panel discussing reserve currencies at the St. Petersburg International Economic Forum today...

...The SDRs would have to be delinked from other currencies and issued by an international organization with equivalent authority to a central bank in order to become liquid enough to be used as a reserve, he said.

As much as 70 percent of the world’s currency reserves are held in dollars, according to the IMF, leading to calls for nations to diversify their cashpiles to avoid excessive exposure to the U.S. economy as it quadruples its budget deficit in a bid to counter the worst recession since the Great Depression. "

We've heard the rumblings over this movement away from the dollar (and towards a new reserve currency) in recent weeks, especially in comments and actions from China.

In fact, this movement away from the dollar seems to be accelerating with recent currency swap agreements (see FT link) and bilateral trading deals that would allow China and its trading partners to settle some transactions in their own currencies, rather than dollars.

Note the Bloomberg piece's mention of the need to create an "international organization with equivalent authority to a central bank" in order to issue a new global reserve currency based on SDR. This is, as RGE's Rachel Ziemba points out, a plan for a global central bank. Stepping stones towards a global currency?

Related articles and posts:

1. Ron Paul: reserve currency should be based on gold - RonPaul.com

2. Introduction to SDRs - IBT Commodities.

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