Could SDRs Threaten the Dollar?

 |  Includes: UDN, UUP
by: The Manual of Ideas

At the recent G20 summit in London, political leaders agreed to create $250 billion of special drawing rights (SDRs), which will be exchangeable into a basket of currencies rather than just the U.S. dollar.

With the dollar continuing to enjoy the position of world's de facto reserve currency, any major issuance of paper money that can be used globally and redeemed into multiple currencies represents at least partly a challenge to the U.S. dollar. However, the prevailing view still seems to be that SDRs cannot threaten the dollar's leadership position, at least not when "only" $250 billion of SDRs are issued. A ten-fold increase in the value of SDRs would probably threaten the monetary supremacy of the U.S. globally, but this is unlikely to occur any time soon.

There are rising signs that China is growing worried over its dollar reserves. According to Reuters:

Some experts think China wants to redenominate some of its huge dollar holdings into SDRs without selling dollars on the open market – which would risk a crash in the US currency and a fall in the value of its reserves. But they say the US and the other countries whose currencies make up the SDR are unlikely to agree.

Disclosure: No positions.