SDR, the IMF`s special international reserve asset

The Special Drawing Right has been the International Monetary Fund`s "artificial currency" since 1969, used notably to calculate the interest rates it charges on loans to member states.

Initially, the international reserve asset was used to support the fixed exchange rate system set up by the Bretton Woods agreement in 1947, when two key reserve assets, gold and the US dollar, were deemed inadequate to support the expansion of world trade and development.

But the collapse of the fixed exchange rate system and the drop of the dollar`s peg to gold in the early 1970s lessened the need for the SDR, which became essentially a tool of the IMF.

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The SDR is not a currency and has no physical representation, but it can be exchanged for freely usable currencies. Its value is calculated as a function of a basket of reserve currencies, which currently includes the US dollar, the euro, the British pound and the Japanese yen.

The IMF executive board is meeting Monday to decide whether to include China`s yuan currency, also known as the renminbi. Signs point to its approval.

Since 2010, the dollar has accounted for 41.9 percent of the basket, the euro 37.4 percent, the pound 11.3 percent and the yen 9.4 percent. The basket`s weight is reviewed every five years.

Each currency of the IMF`s 188 member nations, independent of whether it is included in the SDR basket, is revised daily to reflect global currency market fluctuations.

Thus, on Friday the dollar was worth 0.782 SDR, the euro 0.770 and the yuan 0.114.

In addition to calculating the interest rate on loans, currently at 0.05 percent, SDRs can be allocated to member countries for their reserves.

This procedure however is rare, and has occurred only three times since 1969: 1970-1972, 1979-1981 and in 2009. These SDR allocations were valued at $204 billion.

Countries can use their SDR to repay their loans to the IMF or adjust the composition of their reserves. The Washington-based institution serves as the intermediary for buyers and sellers of the asset.

The trading is voluntary. In principle, the IMF can order a well-financed member country to buy SDRs from a member with a weak external position, to guarantee the smooth functioning of the market.