Tuesday, November 24, 2015

Rueters: Yuan May Enter SDR Basket with Lower Share than First Thought

This is a fascinating article from Reuters that says the IMF is changing the formula used to weight the various currencies in the SDR basket. The change would result in less emphasis on exports and more on financial transactions. Incredibly, the article says that ING calculates that the US Dollar would actually INCREASE its share of the basket despite the Yuan coming in and the Euro would take a big drop. Below are quotes from the article.


"China's yuan may enter the International Monetary Fund's benchmark currency basket at a lower weighting than previously estimated as the IMF considers rejigging the basket to better reflect financial flows, people briefed on the Fund's discussions told Reuters.
IMF policymakers are expected to add the Chinese currency to the Special Drawing Rights basket later this month, after a campaign by Beijing for the yuan, or renminbi, to have equal billing with the dollar, euro, pound sterling and yen.
Adding the yuan to the SDR basket would mark the biggest change since 1980, when the number of currencies in the basket was cut from 16.
Two people familiar with IMF deliberations said policymakers were considering changing the way the weights of currencies in the basket are calculated to make export volumes less important and financial flows more important.
China, the world's largest exporter, lags other countries in financial transactions and such a change would give China's yuan, also known as the renminbi, a lower share in the basket than under the current formula."
. . . . . .
"ING economists reworked the formula to include measures of financial flows in July and came up with a yuan share of 9.2 percent, noting that a smaller share would be less disruptive to markets.
"It's a win-win, the CNY gets added to the basket but at a more measured pace," ING foreign exchange strategist Viraj Patel said.
The ING calculations put the yuan ahead of sterling's 7.9 percent and the yen's 7.0 percent. The euro's share would fall to 32.0 percent under the revised formula and the dollar's would rise to 43.9 percent."
My added comments: If the US dollar share of the SDR basket actually goes up as ING suggests when the yuan enters that will surprise a lot of analysts. I have not seen anyone forecasting the dollar share to go up until this article.

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