Volume 19, Number 2, December 2024
| The fluctuations in the international reserve currency portfolio of Special Drawing Right
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Abstract
The Bretton Woods Conference in 1944 established gold as a reserve asset for the international monetary system, linking currency values to gold and supporting a fixed exchange rate system. However, the collapse of the US dollar and the loss of gold caused many countries to abandon fixed exchange rates and switch to a floating exchange rate system. The International Monetary Fund (IMF) introduced the Special Drawing Right (SDR) in 1969 as a reserve asset and unit of account, originally based on a basket of 16 currencies. In 1980, the IMF adjusted the SDR’s composition weight to a 5-currency basket with floating exchange rates. The objective of this paper mainly discusses each the SDR of composition weight adjustment of the daily exchange rate from 1981 to the 2021 calendar year by using Markowitz's portfolio theory to calculate the risk value changes of its floating exchange rate system. This study demonstrates that the IMF can effectively reduce the risk of exchange rate fluctuations by adjusting the composition and weighting of its portfolio every five years. The IMF effectively reduces exchange rate volatility risk and decreases the foreign exchange reserve market’s reliance on the dollar.
Keywords:International Reserve Currency, Special Drawing Right, Basket of Currencies, Portfolio Theory, Dynamic Volatility
JEL Classification: E42; E52; F33; G15; G18