Don’t be fooled: The SDR is designed as a rescue operation for the US dollar

…Triffin dilemma …Loss of confidence in the US dollar…

From the 1960s, there was a widespread concern of the sustainability of the Bretton Woods system of using national currencies as reserve assets. This was most closely associated with the Triffin dilemma, witch predicted a loss of confidence in the gold value of the US dollar as the value of liquid claims on the United States in the form of dollar foreign exchange reserves increased. Triffin argued for the need to choose the rate of global reserve growth collectively rather than allow it to be a by-product of national decisions.

 

The SDR Substitution Account

…SDR…Away from the dollar…

The IMF created the SDR (Special Drawing Rights) Substitution Account in 1969. The core idea of the SDR is that the SDR Substitution Account Central Banks allows to diversify their existing dollar reserves in a one-time conversion away from the dollar into IMF’s SDR, comprised of the US dollar, European euro, Japanese yen and British pound, in an off-market transaction, so as not to depress the dollar’s exchange rate.

 

By public introduction careful terminology avoided the label of reserve asset and suggested that the SDR was designed to add to rather than replace existing (dollar) reserves. This was pure cosmetic.

 

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