Why Governments Use Fixed Currency Rates?


Most major world currencies change openly on the currency exchange market, compared to the socalled”pegged currencies”, which are tied into another significant currency. The two common types of a fixed rate foreign currency regime add a predetermined and unconvertible exchange rate, and also a predetermined and non refundable exchange speed. The first method of fixing the exchange rate calls for a ban on the free conversion of their local currency into a foreign currency as the next one features absolutely free market for foreign exchange but fixes the exchange rates of the local currency.

The currency monies cannot float freely onto the currency cad to usd conversion market and their money rates fluctuate in conjunction to the changes of the base currency. Such a platform offers basic protection against drops of the currency rates of this currency but leaves it dependent on a foreign currency including all the risks associated with an unexpected weakening of their base money.

Opponents of the fixed rate exchange regimes argue that they are in contradiction into the basics of the freemarket system, thus they are ineffective and dangerous in times of economic crisis because this kind of foreign exchange regime does not offer shelter for your currency. The free-floating currencies are more in a position to adjust to financial market shocks, so critics insist. Another disadvantageous portion of the fixed exchange rate is the fact that the government is made to maintain large foreign exchange reserves to maintain the fixed money exchange levels.

Among the benefits of the foreign currency exchange regime is the greater confidence of the investors within the specific currency and also the decreased trade and investment risks as a result of dearth of fluctuations in the money rates. Theorists assert that a fixed exchange rate additionally inhibits inflation, which will be a curse for conducting business and prevents marketers out of long-term planning.

As a rule, the fixed exchange rate is considered a temporary step for stabilisation of the area market or as something used in preparation for major financial reforms. However, there are states in Europe, whose currencies are criticised for decades without causing any trouble into the regional economies. On the other hand, the most restrictive fixed rate foreign exchange regimes could be observed on the list of less economically developed nations and there isn’t any signs that introduction of such regulations fostered the regional economies, analysts comment.

The advantages and disadvantages of the free floating and fixed money rates have been subject of debate for years but the widespread belief is that the floating exchange rate is much significantly more advantageous for the majority of the developed market economies. Some experts believe that the fixed currency exchange is an conventional idea however it might possibly be a handy tool when a government has no other choice but to peg its currency to a major world currency to secure their economies.

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