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Frequent Contributor
chad
Posts: 1,477
Registered: ‎10-25-2006
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Currency pegging

[ Edited ]

Here's a quick introduction to currency pegging:

 

http://questions4thoughts.wordpress.com/what-is-currency-pegging/

 

Basically. a nation can peg its currency to another (i.e. fix the exchnage rate) to help stabilize its economy. There is quite often a "loss of face" when a nation does this. That is, it often means that the "pegging nation" was managing the economy poorly. And pegging is usually referred to as a "devaluation" of the currency, although a currency can become "devalued" in other ways. I suppose the U.S. could have pegged its currency to the Euro to help stabilize the economy- I think the EU is the largest economy. But as it so happened, there were some problems with the Euro that had be ironed out, and of course, Sam the Eagle would have frowned- it would have meant that the European economy was stronger, more stable etc...And generally, the pegging country pegs to a currency of a larger economy. So, the U.S, could peg to the EU or even China I guess. (but China usually pegs the juan to the dollar)..Interestingly. when China pegs, the result is not necessarily a loss of face or "reputation" for that nation and I think it has something to do with its large foreign currency reserves.....anyway, should a nation ever peg its currrency? up for commentary.....

 

 

Chad

 

PS- I came across "the nixon shock" which was basically Nixon telling everyone what the value of the dollar was after a costly war effort in Vietnam. The Nixon shock was a devaluation, but not a pegging of the U.S. Dollar and interestingly, in spite of Nixon's "crook" reputation, the devaluation was viewed as a "save" for the economy and a positive achievement of the Nixon admin......

Frequent Contributor
chad
Posts: 1,477
Registered: ‎10-25-2006
0 Kudos

Re: Currency pegging

[ Edited ]

Just to add: the banks will occasionally find stability in pegs or currencies which do not fluctuate too radically. The Japanese Yen (sometimes pegged to the U.S. dollar) and the Swiss Franc (not pegged) are great examples. Unfortunately, stability has recently been in high demand, causing an undesired fluctuation in normally stable currencies like the Swiss Franc and the Japanese Yen. There have been reactions on the part of both governments to compensate. And, can you believe it(?),  the U.S. dollar once again became a stable currency for investors, but stable by default it seems. The Euro is still in a state of disrepair, and investors can only buy so much of the yen or the franc.....

 

Chad