FACTBOX-The appeal of the IMF's Special Drawing Rights

(For related analysis see [ID:nLN388353])

March 24 (Reuters) - Large emerging economic powers are pushing for an overhaul of the global monetary system to dislodge the dollar as the dominant reserve currency.

China said on Monday the Special Drawing Rights (SDR) allocated by the International Monetary Fund (IMF) should be used more widely in place of the dollar. [ID:nPEK18458]

Last week, Russia said it would put forward a proposal for the creation of a new reserve currency issued by international financial institutions at the Group of 20 meeting in April. [ID:nLG32185]

Moscow said it has the support of other emerging market countries, including Brazil, South Korea and South Africa for its proposal. [ID:nLJ936330]

OVERVIEW

The SDR is an international reserve asset allocated to member countries in proportion to their IMF quotas, which generate most of the Fund's resources and determine a member's voting power in the Fund. The SDR's value is based on a basket of international currencies made up of the dollar, euro, Japanese yen and British pound.

THEN AND NOW

The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in the system needed official reserves -- gold and widely accepted foreign currencies -- that could be used to purchase the domestic currency in world foreign exchange markets, as required to maintain its exchange rate. But the global supply of gold and the U.S. dollar wasn't enough to support the expansion of world trade and financial development. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF called the SDR.

A few years later, the Bretton Woods system collapsed and major currencies shifted to a floating exchange rate system regime. In addition, the growth in world capital markets facilitated borrowing by credit-worthy governments. Both of these developments lessened the need for SDRs.

Today the SDR has only limited use as a reserve asset and its main function is to serve as the unit of account of the IMF and some other international organisations.

NOT A CURRENCY

The SDR is not a currency. It is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.

HOW IS THE SDR VALUED

The U.S. dollar-value of the SDR is posted daily here. It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

SDR ADVANTAGES

Some international economists argue that creating a truly global reserve currency, through a new SDR allocation, would be a quick way to help credit-starved emerging and developing countries boost spending.

China argues that allocating more SDRs would give the IMF more resources and help it address imbalances in voting power within the IMF, which has long been dominated by the United States and Europe.

(Source: International Monetary Fund) (Reporting by Lesley Wroughton; editing by Stephen Nisbet)