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Monday, the International Monetary Fund (IMF) announced that it has determined a New currency weight for the Special Drawing Rights (SDR) valuation basket. The SDR is a basket made up of a collection of currencies that consist of the Euro, the Yen, the Pound Sterling, and the US Dollar. After the Bretton Woods accord was established, the international community created a new international reserve asset, in order to promote global trade and financial markets, since the US Dollar and Gold were in short supply, which were the major reserve assets during that time.

SDR Construction & Methodology

From the IMF: (.pdf):

The basket composition is reviewed every five years by the Executive Board to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems.

The weights assigned to these currencies continue to be based on the value of the exports of goods and services by the member (or by members included in a monetary union) issuing the currency and the amount of reserves denominated in the respective currencies that are held by other members of the IMF.

Ironically, the IMF is reducing it weighting in the US dollar and the Yen, in favor of a higher weighting in the Euro and the Pound Sterling. This action definitely, helps to further fuel the fire of the US dollar and Yen bears. Both economies are currently experiencing high levels of debt as a percentage of GDP, and an aging population, which typically is bad news for any country’s economy.

Although this rebalancing does not take place until year end, it is highly likely that currency traders will begin establishing bearish positions in both the Yen and the US Dollar. The bullish camp will establish positions in the Euro, Pound and many precious metals, especially gold and silver, which have already seen record levels.

IMF SDRs Weightings

2005

2010

Chg(+/_)

US Dollar

44.00%

41.90%

-2.10%

Euro

34.00%

37.40%

3.40%

Pound Sterling

11.00%

11.30%

0.30%

Japanese Yen

11.00%

9.40%

-1.60%

Source: International Monetary Fund

Disclosure: Long IAU

Source: The Further Decline of the Dollar