A fixed exchange rate, is sometimes also referred to as a pegged exchange rate. It is a type of exchange rate regime in which a value of one currency is matched to the value of another single currency or to a group of other currencies, or it may also be matched to another measure of value, such as gold.
In order to stabilize the value of a currency a fixed exchange rate is usually used, vis-a-vis the currency it is pegged to. The trade and investments between the two countries is facilitated by this exchange rate regime, and it is particularly useful for small economies where external trade constitutes a large part of their GDP.
This exchange rate regime is also used as a means by which inflation is controlled. However, as there is arise and fall in the reference value, so does the same rise and fall is shown by the currency pegged to it. In addition to this, in order to achieve macroeconomic stability the use of domestic monetary policy by the government is prevented by a fixed exchange rate.
Maintaining a Fixed Exchange Rate
Typically, if a government is willing to maintain a fixed exchange rate then this can be done either by buying or selling its own currency on the open market. This is one of those reasons due to which governments maintain reserves of foreign currencies.
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Tagged as:
balance of trade,
black market in foreign currency,
Capital Control,
control of inflation,
Criticisms,
currencies,
currency conversion,
current account transactions,
domestic currency,
domestic market,
dynamics of balance of payment,
exchange rate regime,
FDI,
fixed exchange rate,
Fixed Exchange Rate Regime vs. Capital Control,
foreign currency,
GDP,
inflation,
macroeconomic stability,
Maintaining a Fixed Exchange Rate,
means of maintaining a fixed exchange rate,
pegged exchange rate,
reserves of foreign currencies,
small economies,
stability of the economy system,
trade deficit
The fluctuations in FX rates in a floating exchange rate regime are explained by the following theories:
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International parity conditions
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Balance of payments model
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Asset market model
None of the models that has been developed so far have achieved success to explain FX rates levels and volatility in the longer time frames. The above models make us understand that the exchange rates are affected by many macroeconomic factors and in the end currency prices are a result of dual forces of demand and supply.
For any given currency Supply and demand, and thus its value, are not influenced by any single element but rather than that they are influenced by several factors. These elements are generally divided into three categories:
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economic factors,
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political conditions
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market psychology
Economic factors
The economic factors include:
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economic policy, that are disseminated by government agencies and central banks,
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economic conditions, that are generally elaborated through economic reports,
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and other economic indicators.
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Tagged as:
Balance of trade levels and trends,
budget deficits,
business cycles,
capacity utilization,
central banks,
country's currency,
Determinants of FX Rates,
Economic Conditions,
economic factors,
Economic growth and health,
economic indicators,
Economic numbers,
Economic Policy,
economic reports,
employment levels,
EUR/USD,
financial difficulties,
Flights to Quality,
floating exchange rate,
fluctuations in FX rates,
forces of demand and supply,
foreign exchange market,
forex,
FX,
FX Rates,
GDP,
government agencies,
Government budget deficits or surpluses,
high level of inflation,
inflation,
Inflation levels and trends,
Long-term Trends,
macroeconomic factors,
market psychology,
political conditions,
Political instability,
Price charts,
Productivity of an economy,
purchasing power,
retail sales,
Technical trading considerations,
traders
