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WIuL CurrencIes Are Pegged Lo LIe

DoIIur?
WIuL GIves u Currency VuIue?
Iuncton
TIe purpose oI u currency peg Is Lo IucIIILuLe InLernuLIonuI Lrude und IosLer economIc growLI.
CompunIes LIuL do InLernuLIonuI busIness usuuIIy Iuve Lo uccounL Ior IIucLuuLIons In currency
us eILIer u cosL or beneIIL oI doIng busIness. or exumpIe, seIIIng producLs In u currency LIuL
Is guInIng vuIue Increuses proIILs wIen converLed buck InLo LIe domesLIc currency. BuL LIe
opposILe Is uIso Lrue. Currency pegs provIde consIsLency und reIIubIIILy, oILen essenLIuI
prerequIsILes Lo LIe InvesLmenL oI Iurge sums.
Ieatures
A currency peg, uIso known us u IIxed InLeresL ruLe, cun be seL by IIuL, wIIcI Is Lo suy IL Is
sImpIy mude IIIeguI Lo excIunge uL uny oLIer ruLe. More oILen, Iowever, currency pegs ure
uccompunIed by u correspondIng moneLury poIIcy LIrougI open murkeL operuLIons wILI
reserves oI LIe currency Lo wIIcI LIey ure pegged. I LIere Is Loo mucI oI IL cIrcuIuLIng, LIe
Iuw oI suppIy und demund dIcLuLes LIe vuIue oI LIe currency wIII decIIne. TIe suppIy Is Loo
greuL. n response, LIe counLry excIunges reserves oI LIe peg currency Ior ILs own, wIIcI IL
Lukes oII LIe murkeL. I LIe suppIy Is Loo smuII, LIe counLry puLs new money InLo cIrcuIuLIon
by buyIng LIe reserve currency.
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Types
WIIIe IL's IeusIbIe Lo peg currencIes uL u 1:1 ruLIo, LIIs Is very rure. n mosL cuses LIe currency
Is pegged uL some oLIer ruLIo, usuuIIy reIIecLIng LIe excIunge ruLe uL LIe LIme LIe peg Is
esLubIIsIed or some LurgeL. L's uIso possIbIe Lo peg u currency Lo u buskeL oI currencIes, wIIcI
provIdes LIe sLubIIILy oI dIversILy. CIInu, Ior exumpIe, uILered ILs sLrIcL currency peg In zoo
Lo permIL u gruduuI upprecIuLIon uguInsL u group oI currencIes.
8gnIcance
Currency pegs ure usuuIIy underLuken by smuII counLrIes und LIose wIose economIes ure
bused on exporLs. TIe doIIur becume LIe worId's reserve currency uILer WW becuuse
WIat WIat WIat WIat Currences Are Pegged to tIe Currences Are Pegged to tIe Currences Are Pegged to tIe Currences Are Pegged to tIe Dollar? Dollar? Dollar? Dollar?
In c jree mcrlet sstem, the tclue oj c currenc rises cnd
jclls dependin on the tclue oj uhct is supportin it,
uhether it's old or the economic output oj cn econom.
ut eten ded-in-the-uool, crch consertctites see some
uisdom in mcintcinin currenc pes, uhich linl
motement in one currenc to motement in cnother.
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represenLed LIe IurgesL pIysIcuI goId reserves. As LIose reserves dwIndIed und currencIes IeIL
LIe goId sLundurd, LIe IucL crude oII Is prIced prImurIIy In U.S. doIIurs on mosL excIunges
IeIped muInLuIn u consLunL demund Ior doIIurs uround LIe worId und reuIIIrm LIe doIIur's
sLuLus us LIe worId's reserve currency. CounLrIes LIuL prImurIIy exporL oII or Iuve dIrecL Lrude
wILI LIe U.S. us u mujor componenL oI LIeIr GDP ure LIe mosL IIkeIy Lo Iuve u U.S. doIIur peg.
Potental
WIen u currency Ioses vuIue, prIces Lend Lo rIse In u pIenomenon cuIIed "InIIuLIon" und
currencIes pegged Lo LIe decIInIng currency uIso succumb Lo prIce InIIuLIon. TIe Iuge decIIne
In LIe vuIue oI LIe doIIur In LIe IusL IuII oI LIe zoLI cenLury und LIe ucuLe deprecIuLIon
beLween zoo und zoo8 cuused severuI counLrIes Lo reLIInk LIeIr doIIur pegs. Some, sucI us
SyrIu, Iuve InsLeud moved Lowurds dIversIIIed reserves IncIudIng euros und goId. Some oII
bourses Iuve even conLempIuLed prIcIng In IocuI currencIes und euros In uddILIon Lo doIIur,
erodIng demund Ior doIIurs. TIougI LIe doIIur upprecIuLed In LIe IusL IuII oI zoo8, muny
specuIuLed IurLIer decIInes wouId ensue us u resuIL oI LIe Iuge economIc sLImuIus und buIIouL
puckuges uImed uL LIe credIL crIsIs.
Tme Irame
As LIe ucLIons oI CIInu und SyrIu IndIcuLe, no IIsL oI pegged currencIes cun uIwuys be
uccuruLe. NeverLIeIess, us oI zoo8, LIere were uL IeusL 1; nuLIonuI currencIes pegged Lo LIe
U.S. currency, noL counLIng oLIer orgunIzuLIons LIuL muInLuIn u sImIIur IInk. TIese IncIude
LIe NeLIerIunds AnLIIIeun guIIder, Arubun IIorIn, JordunIun dInur, BuIruIn's dInur, ebunon's
pound, Omun's rIuI, QuLur's rIuI, LIe SuudI rIyuI, EmIruLI dIrIum, MuIdIvIun ruIIyuu,
VenezueIun boIIvur, LIe BeIIze doIIur, LIe BuIumIun doIIur, LIe Hong Kong doIIur, LIe
Burbudos doIIur, LIe TrInIdud und Tobugo doIIur, und LIe EusLern CurIbbeun doIIur, wIIcI Is
used by AnLIguu, DomInIcu, SL. KILLs, SL. ucIu, SL. VIncenL, LIe GrenudInes und Grenudu.
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