currency pegging (1)

7/31/2019 Currency Pegging (1)

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THERESA ANTHONY

ROLL NO. : 47


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ROLL NO. : 47

WHAT IS PEGGING?

Pegging is a method of fixing a country'scurrency to stay at a certain rate below orabove another country's currency.

Pegging is characterized by having a fixedexchange rate. When a country pegs theirmoney to a commodity - gold, silver,

uranium - The value of the currency wouldthen be in direct proportion to the value ofthe commodity.


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A country can have control of its currency by

trading it in the world exchange market: if theexchange rate is too low, they can sell some oftheir currency; if the exchange rate is too high,then exports are reduced and the likely result is arecession; this is happening in South East Asia.

Currency Pegging is also called as the FixedExchange Rate.

In simple words, currency pegging is a conceptof fixing the standard rate of one currencyagainst the another or group of currencies.


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DefinitionA method of stabilizing a country's currency by fixingits exchange rate to that of another country.

A practice of and investor buying large amounts of anunderlying commodity or security close to the expirydate of a derivative held by the investor. This is done

to encourage a favorable


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ObjectiveTo discuss the meaning, efficacy

and ramification of having afixed exchange rates system anda floating exchange rate system


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EMERGENCE OF CURRENCYPEGGING

1870- 1914 : Fixed exchange rate system1960 : US inflation rates1971 : Increased inflation rates led the Brettonwoods system

to suspend

1973 : Developing countries continued to peg their exchangerates

1975 : 87% of the developing countries had a Pegged ExchangeRate system

1970 : Shifting from Single Currency Peg to Basket ofCurrencies Peg

1990 : Only 45% of the developing countries had Pegging System1997- 1998 : Due to Asian Crisis, many countries had abandoned their

peg system and adopted Floating Rate System


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Features It is also known as fixed interest rate.

Accompanied by a corresponding monetary policythrough open market operations.

If there is too much of it circulating, the law of supplyand demand dictates the value of the currency will

decline . If the supply is too small, the country puts new money into

circulation by buying the reserve currency.


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Functions To facilitate international trade and foster economic

growth.

Fluctuations in currency has either a cost or benefit ofdoing business

E.g.: Selling products in a currency that is gainingvalue increases profits when converted back into thedomestic currency.


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Types of pegging

Float :

A floating exchange rate or fluctuating exchange rate is atype of exchange rate where in a currency's value is allowed

to fluctuate according to the foreign exchange market. Acurrency that uses a floating exchange rate is known as afloating currency.

Pegged float:

Pegged floating currencies are pegged to some band orvalue, either fixed or periodically adjusted.
http://en.wikipedia.org/wiki/Foreign_exchange_markethttp://en.wikipedia.org/wiki/Foreign_exchange_market


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Contd. Fixed:

A fixed exchange-rate system is a currency system in

which governments try to keep the value of theircurrencies constant against one another.

Currency board:

Acurrency board is a monetary authoritywhich isrequired to maintain a fixed exchange rate with aforeign currency.
http://en.wikipedia.org/wiki/Monetary_authorityhttp://en.wikipedia.org/wiki/Fixed_exchange_ratehttp://en.wikipedia.org/wiki/Fixed_exchange_ratehttp://en.wikipedia.org/wiki/Monetary_authority


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Contd.

Dollarization:

Dollarization occurs when the inhabitants of acountry use foreign currency in parallel to or instead ofthe domestic currency. The term is not only applied to

usage of the United States dollar, but generally to theuse of any foreign currency as the national currency.


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SignificanceCurrency pegs are usually undertaken by small

countries and those whose economies are based onexports.

Eg: The dollar became the world's reserve currency

after WWII because represented the largest physicalgold reserves.


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BenefitsFosters stability

Better market value

Easy conversion

Investment opportunities


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CONCLUSIONPegging a currency can work to produceconducive trading environments and fiscalstability respective to world markets but it

does have a sinister side if over done.

There are a few difficulties that can beattributed to floating a currency but

ultimately these are far outweighed by thestrength and stature a currency attains fromthe equilibrium attained by floating in theinternational market.


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currency pegging (1)

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