Special Drawing Rights Certificate account account, balance

smartpants

What does the Special Drawing Rights Certificate account on the Fed`s balance sheet mean?

shootingstar

An SDR is purely a reserve currency, not an actively traded/used currency in the markets. As other people have explained its an artificial currency made up of USD, Yen, Sterling, and Euros weighted on their respective importance in the global economy. I say its a reserve currency because its sole purpose is to sit on the balance sheet of the country’s foreign reserves. These are used for intervention purposes mainly. The main idea is that countries can exchange their SDRs for a ‘hard’ currency if they needed to intervene on the FX market to aid in liquidity.
Ex. Egypt’s markets and businesses are finding it hard to conduct business because of lack of credit available to them in USD. Well the IMF allocated Egypt an amount of SDRs, so they would sell these SDRs to another country to obtain USD which they could then inject into their economy.

cyber21

Let me try an explanation.
Lets first understand why USD is a preferred trading currency for international transactions?
Say, you are a cotton exporter in India and you make a shipment to a purchaser in Philippines. If the purchaser pays you in his local currency ‘Peso’, will you accept it? Probably Not. Because, ‘Peso’ do not have enough liquidity in Currency Markets. Means, there is a higher bidask spread for conversion between PHP (Philippine Peso) and INR (Indian Rupee). Meaning, if you accept Peso, you end up with having lower net INR amount.
Because, USD is much more liquid and acceptable globally, it becomes the currency for trading and also as a store of foreign exchange reserves for countries.
But this makes foreign govts too much dependent on USD. Their value of reserves becomes too much dependent on US Fed’s policies and competency.
So, to avoid having too much dependence on a single currency, IMF had come up with an artificial currency SDR, which is a basket of 4 currencies (USD included) in some fixed weights. But to my knowledge, SDRs did not pick up to the extent they were intended for and USD remained being used as International Trade Currency. Now, in the changed times, when USD is exposed to risk of a major fall, SDRs may gain their usage.

ramdabom

I know its an account of the Fed with the IMF…i guess…but what is it for and why?