Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Currency exchange rates make up a very important part of a nation's economy. The exchange rate is the value of the currency compared to another one. The value of some currencies is free-floating.
This means they fluctuate based on supply and demand in the market, while others are fixed. This means they are pegged to another currency. In this article, we discuss exchange rates that are pegged to the U.
When countries participate in international trade, they need to ensure the value of their currency remains relatively stable. Pegging is a way for countries to do that. When a currency is pegged, or fixed, it is tied to another country's currency. Countries choose to peg their currency to safeguard the competitiveness of their exported goods and services. A weaker currency is good for exports and tourists, as everything becomes cheaper to purchase. The wider the fluctuations in currencies, the more detrimental it can be to international trade.
Many countries, though, chose to maintain a fixed policy, and today, there are still a significant number of currencies pegged to the U. The greenback, as the U. This system cut back the volatility in international trade relations as most currencies were pegged to the U. This agreement was ended by President Richard Nixon in the early s.
Once the system collapsed, countries were free to choose how their currencies would work in the foreign exchange market. They were able to peg it to another currency, a currency basket , or let the market determine the currency's value.
Today, there are two types of currency exchange rates that are still in existence—floating and fixed. Kitts, St. Lucia, St. Vincent and the Grenadines and Grenada.
Barbados fixes its dollar with the U. Countries in Africa frequently use currency pegging, although many are linked with the CFA Francs, two currencies used in Central Africa. Both are guaranteed by the government of France, so ultimately, the Euro influences international value. Dijibouti and Eritrea peg local currencies with the U. Unlike Africa, the U. Particularly in the oil-rich countries, pegging to the U. Economies are less volatile than when floating on commodity market demand. A common element with all fixed or pegged foreign exchange regimes is the need to maintain the fixed exchange rate.
This requires large amounts of reserves, as the country's government or central bank is constantly buying or selling the domestic currency. China is a perfect example. Before repealing the fixed-rate scheme in , Chinese foreign exchange reserves grew significantly each year in order to maintain the U. The pace of growth in reserves was so rapid it took China only a couple of years to overshadow Japan's foreign exchange reserves. The problem with huge currency reserves is that the massive amount of funds or capital that is being created can create unwanted economic side effects —namely higher inflation.
The more currency reserves there are, the bigger the monetary supply , which causes prices to rise. Rising prices can cause havoc for countries that are looking to keep things stable.
These types of economic elements have caused many fixed exchange rate regimes to fail. Although these economies are able to defend themselves against adverse global situations, they tend to be exposed domestically. Many times, indecision about adjusting the peg for an economy's currency can be coupled with the inability to defend the underlying fixed rate. The Thai baht was one such currency.
The baht was at one time pegged to the U. Once considered a prized currency investment, the Thai baht came under attack following adverse capital market events during The currency depreciated and the baht plunged rapidly, because the government was unwilling and unable to defend the baht peg using limited reserves. In July , the Thai government was forced into floating the currency before accepting an International Monetary Fund bailout.
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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways By pegging its currency, a country can gain comparative trading advantages while protecting its own economic interests. A pegged rate, or fixed exchange rate, can keep a country's exchange rate low, helping with exports.
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