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* IMF Calls for New World Currency

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Location: D.C., Washington, United States
Published: February 11, 2011 04:36 am EST

International Monetary Fund Managing Director Dominique Strauss-Kahn called Thursday for a new global currency to challenge the dollar’s dominance and reduce financial instability.

In lieu of relying mainly on the greenback, Strauss-Kahn said in a speech in Washington that reserves of member-countries or special drawing rights (SDRs) held by the IMF could be used in pricing international trade.

Using SDRs would provide a buffer from exchange rate volatility. The IMF official said the fund could issue SDR-denominated bonds that would create a potentially new class of reserve assets. The proposal is also found in a policy paper published by the IMF.

Strauss-Kahn told the gathering of top-level economists to tackle the future of the international monetary system that the IMF should start to include the Chinese yuan in the basket of currencies it uses to value the SDRs. The current basket includes the dollar, sterling, euro and yen.

China holds up to $ 2.85 trillion of reserves in U.S. Treasury bonds and has expressed several times unease about the value of the dollar. However, American politicians in turn have complained that China enjoys unfair advantage by keeping the yuan cheap.

Stauss-Kahn pointed out that global imbalances such as large and volatile capital outflows, exchange rate pressures and fast growing excess reserves have returned. If these issues remain unresolved, he warned it could start the seeds of the next crisis.

SDRs were initially used in 1969 in support of the Bretton Woods fixed exchange rate system. However, after that the role of SDRs declined but in 2009 at the London G20 meeting, world leaders agreed to boost SDRs to $ 250 billion. The hike led to speculations that SDRs may play a major role again in the global monetary system.

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