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World Currency Unit
Comparison of WCU with Special Drawing Rights
Home > Comparison of WCU with Special Drawing Rights

The World Currency Unit involves several currencies it is not just a basket of currencies, but a basket of currencies each indexed against inflation in order to preserve its global purchasing power. In contrast, the Special Drawing Right is a basket of currencies whose value is announced daily by the IMF based on the exchange rates of the currencies making up the basket, as quoted at noon at the London market. (If the London market is closed, New York market rates are used; if both markets are closed, European Central Bank reference rates are used.)

Assuming there is uniform inflation around the world and no change in exchange rates, the nominal value of the SDR, expressed in US dollars, will not change, so that each SDR will actually lose purchasing power. Inflation will, on the other hand, boost the nominal value of the WCU2015 (base year 2015, defined as the year all normalized currencies are each worth US$1), so that the increased US dollar value of the WCU2015 will buy the same output basket as in the base year.

Another difference relates to the weighting. The amounts of each currency making up one SDR are chosen in accordance with the relative importance of the currency in international trade and in major central bank's foreign exchange reserves. The determination of the currencies in the SDR basket(currently US dollar, the Euro, the Yen, the British Pound, and the RMB) and their amounts is made by the IMF Executive Board every five years. Since the WCU is a basket of gross domestic products of the constituent economies, the bigger the economy the more heavily its currency will be weighted. In short, compared to the SDR, the WCU is subject to a different weighting scheme, and there is built-in indexing with reference to the consumer price indices. The WCU also deliberately includes resource-rich economies like Australia and Canada. The WCU aims at capturing how much money is needed to buy the same output as defined in the base year.