April 3 (Bloomberg) -- The dollar’s role as a reserve currency won’t be threatened by a nine-fold expansion in the International Monetary Fund’s unit of account, according to UBS AG, ING Groep NV and Citigroup Inc.

Group of 20 leaders yesterday gave approval for the agency to raise $250 billion by issuing Special Drawing Rights, or SDRs, the artificial currency that the IMF uses to settle accounts among its member nations. It also agreed to put another $500 billion into the IMF’s war chest.

“I don’t think that will dent the importance of the dollar,” Wang Tao, head of China research at UBS AG and former IMF economist, said in an interview today. “They are not talking about an expansion in the use of the SDR.”

People’s Bank of China Governor Zhou Xiaochuan last week urged the IMF to expand the functions of SDRs and move toward a “super-sovereign reserve currency.” Russia President Dmitry Medvedev told leaders at the summit that such a currency should be partially backed by gold and based on strong regional currencies, his office said.

The Dollar Index, which the ICE uses to track the greenback against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, fell 1.2 percent yesterday and dropped 0.2 percent to 84.30 as of 9:42 a.m. in London.

Dollar Shortage

The U.S. had blocked a doubling of the amount of SDRs outstanding over the past 12 years, according to the IMF Web site. SDRs were created by the IMF in 1969 to support the Bretton Woods exchange-rate system that collapsed in 1971. They act as a unit of account rather than a currency.

The Dollar Index rallied 17 percent in the past year as the bankruptcy of Lehman Brothers Holdings Inc. in September caused credit markets to freeze, prompting investors to dump riskier assets and hoard dollars. The increase in SDRs will allow developing nations to tap IMF money without having to accept policy changes often demanded as a condition of aid.

The cash is disbursed in proportion to the money each member-nation pays into the fund. Rich nations will be allowed to divert their allocations to countries in greater need.

BNP Paribas SA said easing the dollar shortage may weaken the U.S. currency. SDR-denominated debt sold by the IMF may displace dollars in currency reserves, London-based global head of currency strategy Hans-Guenter Redeker said in an interview.

“What the SDR discussions mean is that we could see the IMF being put in a position where it could raise in the capital markets funds in SDR-denominated debt,” Redeker said. The debt could be used “by China and other central banks to be put into their currency reserves, at the expense of the U.S. dollar.”

SDR Expansion

Chinese Premier Wen Jiabao has said he’s concerned that a weaker greenback will erode the value of China’s $740 billion in Treasuries as the U.S. tries to spend its way out of recession. The Dollar Index has declined 16 percent so far this decade.

The value of SDRs are based on a basket including the dollar, the euro, the Japanese yen and the British pound, shielding them from swings in a single currency. One SDR is valued at $1.49661. There are now 21.4 billion SDRs ($32 billion) outstanding, according to the IMF Web site.

The expansion may help boost emerging-market currencies, even as the dollar retains its dominance, said Johanna Chua, head of Asia-Pacific economics research at Citigroup.

“I don’t think this has any direct implication on the U.S. dollar,” she said. “But every time you beef up the resources of an institution whose natural inclination is to help emerging markets, it’s net-net positive.”

Wider Acceptance

China’s Zhou wrote that SDRs should be accepted in international trade and investment so they can be used as a reserve currency. The nation’s currency reserves, the world’s biggest, totaled $1.95 trillion at the end of 2008.

He also proposed more currencies be added to the SDR basket. The current weighting is: 44 percent for the dollar, 34 percent for the euro and 11 percent each for the yen and the pound. It doesn’t include the yuan.

“It’s symbolic that they’re expanding the supply of the SDRs at a time when the Chinese authorities and others have raised questions about the dollar’s status,” said Tim Condon, head of Asia research at ING. “I don’t think there’s going to be U.S. support for anything that is overtly aimed at displacing the dollar as the world’s reserve currency. That process will take a long time.”

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net.

Last Updated: April 3, 2009 05:05 EDT