Forex SDR - Special Drawing Rights

Special Drawing Rights are referred to as SDR. They are a “potential claim on the freely usable currencies of International Monetary Fund members”1 In the past, international transactions were carried out with gold, however, Special Drawing Rights have replaced gold.

Special Drawing Rights are defined via determined major currencies. What are major currencies? They change constantly. Currently, “major currencies” refer to the EUR (Euro), the GBP (Great Britain Pound), the JPY (Japanese Yen), and the USD (Unites States Dollar). The EUR has replaced the German Mark and the French Franc that were previously part of the “major currencies” basket. Major currencies are used in international trade and finance.

Each of the major currencies makes up a part of the Special Drawing Rights. The part that it makes up depends on its importance in the international trade and finance arena. Its part and its importance are in accordance to the role that country’s economy plays; they are proportional. Every five years, the IMF Executive Board meets to discuss which currencies are to be included in the major currencies basket. The IMF also determines the value of the Special Drawing Rights in terms of the USD. It does so on a daily basis, and when calculating the value it relies on the exchange rates of the major currencies.

Some countries actually use Special Drawing Rights to peg their own currency. International organizations and private international financial instruments also use Special Drawing Rights. Special Drawing Rights are also used to transfer roaming charges between international mobile operators as well as to limit carrier liability on international flights.