The campaign to depose the dollar as the global reserve currency has grown significantly stronger with the publication of a United Nations Conference on Trade and Development (UNCTAD) report outlining the role currency speculation and different exchange rate mechanisms played in perpetuating the financial crisis. At the same time, China, which has already started substituting the renminbi for the dollar in cross-border trade transactions, announced it would issue sovereign bonds denominated in renminbi to foreign investors.
Although some believe the ideal solution is a world reserve currency based on the IMF’s Special Drawing Rights (SDR), a London-based start-up called WDX Organisation believes it has a better solution. WDX has launched a new universal currency called the wocu, which is a derivative based on the exchange rates of the world’s top 20 currencies as measured by GDP. Unlike the SDR, which is based on four currencies (US dollar, euro, yen and sterling) and is re-weighted by the IMF every five years, the wocu will be re-weighted by the WDX Institute, an independent body made up of academics and market practitioners, every six months. The wocu was launched on September 10 and will be commercially available by the beginning of next year.
WDX claims the wocu is “non-contentious” because the proportion a particular currency represents within the basket is based on the GDP of the underlying economies.
Although the credit crisis provided the catalyst for the wocu’s official introduction, Michael King, managing director of WDX, says he conceived the idea in 1996. Since then he has been working with others on refining the algorithm for weighting the different currencies that make up the wocu, which he says is “a less volatile currency unit.”
The wocu could be part of a new financial architecture, says Ian Hillier-Brook, a director of WDX, based on a “balanced basket” of currencies rather than a specific country’s currency. He says a number of corporate treasurers and a large commodities player with more than $70 billion of FX risk on its books have already expressed interest in using the wocu to reduce FX volatility.