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IMF Lifts the USD and Yuan Weighting in the SDR Basket

The IMF presented a review of the SDR valuation to determine new currency weights for its valuation basket. The USD and the Yuan show increase in weightage.

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USD and Yuan Weighting Improves in the SDR Currency Basket

In its review, the IMF updated its currency weighting for the SDR basket.  It concludes that the US Dollar and the Chinese Renminbi have higher weights. Lower weightage is given to the Euro, the British Pound, and the Japanese Yen.

The US Dollar and the Chinese Renminbi weighting in the SDR currency basket have gone up.  The Yuan entered the SDR currency basket in 2016, which shows its global acceptance. The SDR has five international reserve assets in its currency basket, of which the US Dollar and the Renminbi are the leading currencies.

The USD/CNY trades at 6.7377 on Tuesday, May 17, 2022, at the time of writing. The Chinese Yuan slipped to 6.8127 on May 13. It was a sharp downtrend in the Chinese Yuan in May 2022. It has weakened from 6.3685 on April 19 to 6.8127 on May 19, a decline of 6.5% within a month. Though the Chinese Yuan prices dropped lower, it has gained weighting in the SDR basket.

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Yuan Weakens to 6.7377
Yuan Weakens to 6.7377

International Monetary Fund Review on SDR Valuation

On May 11, 2022, the IMF Executive Board released its review for currency weighting under the Special Drawing Right (SDR). The update will come into effect from August 2022. The IMF review is made every five years. The basket of international currencies consists of the US Dollar, the Japanese Yen, Pound Sterling, the Euro, and the Chinese Renminbi.

The IMF claims that the Covid 19 pandemic did not have much of an impact on the currency market. The US Dollar continues its top position, though the valuation of the British and the Euro currencies have dropped.

The valuation of the SDR is based on the daily forex exchange rates, within the SDR basket of currencies. It helps to stabilize the international monetary system and mitigate economic and social disturbances.

SDR Valuation Review

The quinquennial review made by the Directors of the IMF includes a weighted average of the values of five currencies. The IMF review reports on the US Dollar, the UK Sterling, the EU’s Euro, the Chinese Renminbi, and the Japanese Yen.

Previously the SDR released its review on currency valuation in 2015. The currency weightage is based on financial market developments that took place after 2015.

The duration is extended by one year, giving allowance to the covid pandemic. The weightage will take effect from August 1.

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In its review, the IMF claims that the US Dollar tops, with a weightage of 43.38%, while previously, it was 41.73%. The Renminbi weightage has improved to 12.28% from 10.92%.

The Euro weightage has come down from 30.93% to 29.31%. The British Pound has fallen from 8.09% to 7.44%. The weightage of the Japanese Yen dropped from 8.33% to 7.59%.

The Chinese Yuan Value Drops with Covid and Lockdown Restrictions

The Chinese economy shows weakness as various lockdown restrictions hit the economy.

Chinese data, released on Monday, on retail and factory activity shows a slowing economy. The covid-19 has devastated the economy. Lockdown continues in various parts of China, and consumer restrictions have gone up. The economy may resume its normal functioning from June 1, state officials.

Despite the slowdown in the Chinese economy, the IMF has lifted the Renminbi’s weighting in the SDR currency basket. The Chinese currency weightage has come up to 12.28% from 10.92%. The PBOC claims that measures to step-up information disclosure will make its currency a better investment proposal among global institutions.

China introduced various financial market reforms to regulate its currency. The central bank intends to bring further reform to its currency, which will help to internationalize the Renminbi. The Yuan’s inclusion as a reserve currency in the SDR is a positive opening for the currency. The IMF directors have called for further data transparency on the currency, to bring its weightage higher. It will create trust among investors.

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Many financial market reforms have been made to the Chinese Renminbi. But it requires further data transparency, conclude the IMF Directors in their review. It will develop the onshore Renminbi market.

The US Dollar As a Leading Currency

The US Dollar surged to the year high on May 13, towards the 104.5 mark, and retreated lower to 103.45 during early trading hours on Tuesday, May 17, 2022. The greenback has drifted from its 2-decade highs. The risk of a global slowdown is hurting the forex market. The US economy shows resilience after the covid pandemic, as the greenback trades above the 100 mark. The Dollar continues its position as an undisputed leader in the currency market with a 43.38% weighting in the SDR currency basket.

 

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