Everything is by design. The currency system is no different. The currency market has had a form of reserve system for over 2000 years. While the current system has been in place since 1971 with the free floating currency prices, the system is going through a likely change yet again. Many in the world including the United Nations, IMF, BRICS, Euro Zone and many others are calling for a new reserve currency. While we know the currency market is going through a wide array of changes with a the possibility of a new reserve system, we do not know exactly what that is or what the currency system will look like 10 years from now.

This is what we know:

1) The world market desires a new currency
2) The world market is preparing for a new currency

We also know there are numerous plans being created for a new currency

1) China: The Chinese are undergoing remarkable progress with the Yuan over the past five years including settling 30% of Chinese trade in Yuan, making international settlement agreements with many countries in the world and will be included in the IMF SDR as soon as 2015.

2) BRICS: The BRICS are Brazil, Russia, India, China, and South Africa. The BRICS have created their own bank to compete with the World Bank, funded the New Development Bank, and are possibly creating a currency to facilitate international trade between the BRICS.

3) EURO: The Euro was created to be a reserve currency and is currently the second leading reserve currency in the world next to the USD as 25% reserve status. The EURO was created to facilitate trade between the Euro Zone countries and many African countries. For a decade the world market including the Euro Zone and the BRICS were positioning the EURO to replace the USD as the world reserve currency. Although that has lost some of its popularity recently with the European debt problems and global financial problems, it is still a possibility.
4) AMERO: This is a hypothetical currency that would exist between Canada, The United States and Mexico. It would be an extension of the North American Free Trade Agreement (NAFTA) and would potentially save hundreds of billions in transaction costs between the three countries. This agreement would be similar to the agreement between the European nations in 1995 with the EUR replacing the local currencies. This hypothetical currency is a long shot as it is very difficult to see the Americans agreeing to replace the USD with its rich place in history.

5) IMF: The IMF has a currency labeled Special Drawing Rights or better known as the SDR. The SDR is an issuance of debt more than a currency. Many believe that the IMF is positioning the SDR to replace the USD as the next world reserve currency.

While some of the potential designs are more likely than not, let’s take a closer look at each plan. The IMF was created as part of the Bretton Woods agreement of 1944 and came to creation with the original articles being signed in 1945. While there are many reasons for the creation of the IMF, one of them is to help facilitate international trade as trade was declining sharply and led to impoverished nations due to this decline. The IMF was also established to aid in the stabilization of exchange rates between the worlds currency system. In 1947, France became the first country to borrow from the IMF.

Prior to 1971 the currency system was a fixed currency system with the USD pegged to the price of gold thus putting pressure on the USD to keep up with the needed liquidity in international trade. It was in this environment that the IMF created the Special Drawing Rights (SDR). The SDR is not a currency or a claim on the IMF. It is a way for the members of the IMF to transfer transfer money from one nation to another or to borrow from the IMF. For example, if country ABC needs to borrow money from the IMF they would put in a claim using SDR, the IMF would then facilitate the exchange using SDR. However, while this is routine, typically the requesting country would want the USD. Even if the requesting country wants the USD, the IMF conducts the exchange through SDR. In the end, the SDR im essence is a reserve asset instead of a currency.

While the SDR is not a currency as of yet, it does have value in the transferring of money through the currency system as member nations must buy SDR to transfer them. This value is based on four currencies including the USD, EUR, GBP, and the JPY. The IMF last met in 2010 and based on the world economic standing, including exporting the IMF decided to keep the current value in line with the four current currencies. In 2015 the IMF is expected to include the Chinese Yuan in the value of the SDR.

The SDR recently has taken on a much greater role in the international trading community with total SDR allocation in the neighborhood of 300 billion USD. Most of this recent movement came in 2009 as a response to the financial global meltdown. It was in this environment that many in the world wanted and requested for the IMF to shift the future of the SDR to more of a currency of value instead of the traditional issuance of debt.  For the past five years the IMF has been positioning the SDR to use as a reserve currency including 1) increasing the holding of the SDR, 2) including the Chinese Yuan in the value of the SDR and 3) printing a coin for the SDR out of Brussels in 2009 with the phrase “Unity in Diversity” on the front of the coin. While this is simply a test coin, many believe it is something far greater.

After the US led global financial crisis in 2008-09 the international trading community wanted to move away from a singular currency such as the USD. The reason was very simple, if the United States struggled and its currency struggled the world market would struggle. The United Nations, Euro Zone, BRICS, and the IMF wanted to diversify from the USD into something that resembled a basket of currencies from different economies throughout the world. While the EUR represented this, it did not represent the entire world market. This is where the IMF SDR could step in as a reserve as it already represented 4 currencies representing competing interests throughout the international trading community. It was the potential currency that could bring the diversity the world market was desiring.

Since 2009 the SDR has become a very popular topic at G7 and G20 economic summits with many wanting more liquidity of the SDR with up to 2 Trillion in liquid assets, once again preparing to either support or thwart the USD dominance as the world’s leading reserve currency.

While it remains to be seen if the SDR can be converted into a currency and thus be used as a reserve currency, it is one of the leading candidates if not the leader to replace the USD.

A look at the Market ahead: with the market responding off support strongly with the FOMC policy announcement. The market is slightly off the highs and will be tested this week in what will be a very light week in both economic data and volume. The FED decided to remove the “considerable time) clause in the policy statement that has been included in the statement for a very long time and replaced it with a “patience” label. No one really knows what either mean or if they are the exact same thing. Regardless of the statement, the market responded bullish and the FED will look to raise rates at the same time regardless of the statement which will be in the 2nd or 3rd quarter of 2015.

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