International Economics - Essay Example

As a substitute, the United Nations supports the use of special drawing rights (SDRs), a creation of the International Monetary Fund (IMF) – a proposal supported by Russia (Bryanski, 2009). The SDR is the designated international reserve asset that is the unit of payment on IMF loans; it has an advantage over the US dollar in that its valuation is calibrated against a basked of currencies, rather than on the currency of a single country. Preferably, however, the UN recommends the establishment of a new reserve system that is not based on just one or even several currencies, but should instead serve the need for stable international liquidity.

In response, several European officials expressed their disagreement, citing the market as the ultimate determinant of which currencies countries would hold in reserve. Several have voiced the concern that political or administrative decisions cannot reformulate the world’s currency system (Vayrynen, in Charbonneau, 2010), and in the entire post-war period the currency exchange system had been based on the U.S. dollar (Sundaram, in Charbonneau, 2010). EU officials fear that any intervention by an administrative body into the workings of the market would just create additional problems and would make things even less predictable (Piebalgs, in Charbonneau, 2010).

Some simply reject the idea of an artificial currency as the SDR as the reserve currency of the international financial system, stating that it is a non-starter because it is created by political decision making (Al-Jasser, in Kessler, 2009). Based on this scenario, some sectors have voiced the possibility that the yuan (or renminbi), the currency of China, may in the span of a decade gain the status of reserve currency and present itself as a suitable alternative to replace the U.S. dollar. Supporters cite the relative stability of the Yuan during the recent financial crisis, saying that it is a better holder of value than the dollar. This