Dominique Strauss-Kahn, managing director of the International Monetary Fund, has called for a new world currency that would challenge the dominance of the dollar and help curb future financial instability.

In a speech in Washington, Strauss-Kahn argued that the reserves that member countries held with the fund could be used, instead of the dollar, to price international trade. These so-called special drawing rights (SDRs) could also act as an alternative to the dollar in central banks' foreign currency reserves.

"Using the SDR to price global trade and denominate financial assets would provide a buffer from exchange rate volatility," he said, while "issuing SDR-denominated bonds could create a potentially new class of reserve assets".

The IMF published a policy paper backing Strauss-Kahn's views as it gathered top-level economists for discussions on the future of the international monetary system.

Strauss-Kahn, who has been tipped as a contender for the French presidency next year, also argued that the way SDRs were valued, which is currently based on a basket of currencies – the dollar, sterling, the euro and the yen – be broadened to include others such as the Chinese yuan.

International policymakers have become increasingly concerned about the threat of currency wars as struggling governments try to hold down their own exchange rates as they clamber out of recession.

Strauss-Kahn admitted that there were formidable hurdles to achieving a greater role for SDRs, but he warned that without urgent action, the simmering conflicts in the international financial system could tip the world back into chaos.

"Global imbalances are back, with issues that worried us before the crisis—large and volatile capital flows, exchange-rate pressures, rapidly growing excess reserves – on the front-burner once again. Left unresolved, these problems could even sow the seeds of the next crisis," he said.

China, which holds much of its $2.85 trillion mountain of reserves in US Treasury bonds, has repeatedly expressed unease about the value of the dollar, while American politicians have complained that Beijing gains an unfair advantage by keeping its own currency cheap.

The idea of SDRs emerged in 1969, to support the Bretton Woods fixed exchange rate system, but when that collapsed a few years later, the role of SDRs was largely forgotten. They allow IMF members the right to swap their own reserves for foreign currencies in times of need.

However, at the London G20 meeting in 2009, in the midst of the credit crunch, world leaders agreed a dramatic $250bn boost to SDRs, sparking speculation that they could play a growing role in the global monetary system.

Strauss-Kahn said the IMF was also examining ways of strengthening international policy co-ordination, and monitoring international imbalances.