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A little more than a year ago the PBOC governor proposed a supra-national reserve asset, like the IMF's Special Drawing Rights (SDRs) to supplant the role of the U.S. dollar. While the proposal does not appear to be the basis of recent G20 discussions, the topic continues to capture the imagination of market participants.

Every five years the IMF reviews the composition and weights of the SDR. Late Tuesday, the IMF announced its adjustments. China's yuan, despite efforts to internationalize its use, remains non-convertible. This may be disappointing to some, but it's perfectly understandable that the yuan is not included in the SDR basket. The dollar's weight in the SDR was cut to 41.9% from 44%. Some will see this as a further sign of the declining significance of the dollar. Yet that might not be the real signal. Taking a longer term view, for example, the dollar's weight in the SDR in 1996 was 39%.

The Deutschemark and French Franc together had a weighting of 32%. The euro's weighting was increased to 37.4% starting next year, from 34%. Initially (2001) the euro's weighting was less than the combined DEM and FRF weighting. Ever since, every 5-year evaluation has seen an increase in the euro weighting.

However, as we have pointed out when looking at the IMF's reserve data (COFER) that to the extent there has been a meaningful shift, it seems that it is not so much at the dollar's expense as it is at the yen's. The yen's weighting in the SDR was cut to 9.4% from 11%. In 1996 it was 18%. Sterling weighting remains essentially unchanged at 11.3% from 11%. In 1996, it was also at 11%.

Disclosure: No positions