Economic parliamentary: political Central Bank of failure to maintain the value of the Iraqi dinar

[yota691]

Economic parliamentary: political Central Bank of failure to maintain the value of the Iraqi dinar

Friday, August 23 / August 2013 09:00

 

[baghdad - where]

Economic Commission described the parliamentary political central bank to maintain the Iraqi dinar against foreign currencies as "failed."

The central bank has promised to take measures to raise and stabilize the price of the Iraqi dinar, as it was in the past, but the impairment and the exchange rate of the dinar continues.

He said the Commission's decision Mahma Khalil told all of Iraq [where] that "the central bank demands to maintain the exchange rate of the Iraqi dinar, and determine a fixed price against the foreign currencies, as may or unreasonable that there is a balance of a sovereign Iraqi exceed seventy billion dollars, and it remains the Iraqi dinar rate Over [1200] dinars per dollar, and sometimes brings about this price on the black market. "

He added that "the policy of the central bank failed to maintain the exchange rate of the Iraqi dinar against a basket of foreign currencies."

The Khalil said that "the exchange rate of the dollar against the dinar depends on several things, including Balance Iraqi sovereign of the dollar, and there are reasons not directly affected by the value of the dinar up and down, climate-related Iraqi politician who became طاردا of foreign currency and is not attractive to them."

"As the government interventions in the political bank, in addition to the desire and the seriousness of citizens to transfer حوالاتهم and deposits of Finance to hard currency and not deposited in banks of Iraq is part of the reasons led to the fluctuation of the dinar against the dollar, there are also reasons to indirect secondary, including international sanctions on Syria and Iran, and the fact that the Iraqi trader merchant pivotal trying to deal with all the nations of the world to the dollar. "

And the decision of the Economic Commission said, "What distracted today dollar of deposits is not the real size of the Iraqi market needs."

Observers believe Economists and analysts said the increased turnout to buy the dollar has led to a significant drop in the price of the dinar, and attribute this to smuggle most of it will offer daily Central Bank of dollars abroad.

The Iraqi Central Bank announced shortly before the new measures restrict the availability of U.S. currency in markets where demand to buy them, amid suspicions suggest the smuggling of large amounts of hard currency for the benefit of neighboring countries.

And issued the CBI, new instructions to stabilize the exchange rate of the Iraqi dinar against foreign currencies select the stakes weekly for banks and money transfer companies and trading firms currency from the dollar is estimated according to the capital each, and are to increase or reduce this share compared to the commitment of all of them deliver the amounts they want customers from citizens.

The central bank starts to put the dollar at an auction for the sale of foreign currency at subsidized prices and the lowest of the real exchange rate in the market to support the dinar. "

Observers fear stop CBI those auctions and then multiply the value of the dollar against the dinar. "  

The central bank is facing charges for the staff in conjunction with officials in the state with corruption, smuggling of currency, the Bank is currently subject to investigations in this regard.

Employees complain and retirees who receive their salaries in dinars from the high cost of living, and that their salaries are no longer sufficient to meet their needs, and that the rise in prices has included real estate and rentals, as well as transportation, food and clothing. 2 ended.

Edited August 23, 2013 by yota691

[deniscanada]

thanksgiving day is coming, and it might be time to get rid of another turkey.

[jeepguy]

good  good dayyy   yota ,,,   looks like someone who post here a lot on vets area , has said this a couple times " Iraq is in the crossroads of the arab region , all roads cut through , or fly over , Iraq !  with the santions on iran , the turmoil in Syria, and Egypt , and trouble in the upper area`s around turkey ,  Iraq currency is wayyyy  under valued,  you know that same person { on vets site  } has said 2 to 1 value     I wonder who that guy is ?    hehehehe  ...  from the way this article reads this guy in the article  sounds like he is about to put a lot of heat  on the c.b.i. and the currency policies ,  ----->  get this dinar value up to where you have promised us !  { he speaks for Iraq }   mmm  1 2014 ?

[sandfly]

YEP HE SAID 2.50 - ONE

[yota691]

good  good dayyy   yota ,,,   looks like someone who post here a lot on vets area , has said this a couple times " Iraq is in the crossroads of the arab region , all roads cut through , or fly over , Iraq !  with the santions on iran , the turmoil in Syria, and Egypt , and trouble in the upper area`s around turkey ,  Iraq currency is wayyyy  under valued,  you know that same person { on vets site  } has said 2 to 1 value     I wonder who that guy is ?    hehehehe  ...  from the way this article reads this guy in the article  sounds like he is about to put a lot of heat  on the c.b.i. and the currency policies ,  ----->  get this dinar value up to where you have promised us !  { he speaks for Iraq }   mmm  1 2014 ?

GM jeepguy, sandfly and all of DV...who are you referring to...  

[sandfly]

WHAT HE PUT OUT LAST APRIL ARE MAY WHAT THEY CAN DO

[hammer911]

Great article Yota!!! GO RV!!!~~~

[SgtFuryUSCZ]

***///

 

Right about the behind-the-scene abuses...

so whatta ya gonna do about it, guy?

 

Let's go, already !  Chop, chop !

[eburt]

Ha - I am not understanding these articles - one day we read one that says it is delayed and another is saying to maintain Dinar againt the Dollar - What is really going on with Iraq and CBI - This thing could go on for years and years.

[shellfish]

I love the duplicity of everything.The more the better.If you can for a moment imagine a world where Iraq was accurately valued on spreadsheets with both a credible fiat and maximum float rate potential. The "whales" would be deciding the size of the crums ,3%-4% which in their world is one heck of a day for them and the traders holding both buy and sell orders on "sticky" notes dated the same would be drooling over the sure thing. I want so badly for DVers to max this thing out and uncertainty gives me hope that big money is a day late and a dinar short. Maybe I'm wrong and some middle of the night event protects us,but if I'm right let those "plutos" suffer some and at least have to pay 120-$1 and we walk with a nice profit. It would hurt me to see them earn the same rate in 24 hours that many good DV folks have 10 years into. For now the messiness holds them at bay. Max out ASAP.

[vomer]

- This thing could go on for years and years.

I don't see how it could go on for years and years given the urgency of things over there.

[calkid11]

GOOD POST YOTA, MAYBE IN THE COMING MONTHS THEY MIGHT GET IT DONE... STILL  GO RV

[vomer]

GOOD POST YOTA, MAYBE IN THE COMING MONTHS THEY MIGHT GET IT DONE... STILL  GO RV

Oh no, it's 'in the comng days', always 'in the coming days' ..

[mrref]

 

Ha - I am not understanding these articles - one day we read one that says it is delayed and another is saying to maintain Dinar againt the Dollar - What is really going on with Iraq and CBI - This thing could go on for years and years.

 It has been going for years like 10 years and will continue..I've been in this so call investment for 10 years and its the same ole story year in and year out. WOW

[jg1]

How do they expect the dinar to stay fixed against the foreign currencies, of course its going to fluctuate. So, let it float.  

 

A fixed exchange-rate system (also known as pegged exchange rate system) is a currency system in which governments try to maintain their currency value constant against one another.^[1] In a fixed exchange-rate system, a country’s government decides the worth of its currency in terms of either a fixed weight of gold, a fixed amount of another currency or a basket of other currencies. The central bank of a country remains committed at all times to buy and sell its currency at a fixed price. The central bank provides foreign currency needed to finance payments imbalances.

 

 

History[edit source | editbeta]

The gold standard or gold exchange standard of fixed exchange rates prevailed from about 1870 to 1914, before which many countries followed bimetallism.^[3] The period between the two world wars was transitory, with the Bretton Woods system emerging as the new fixed exchange rate regime in the aftermath of World War II. It was formed with an intent to rebuild war-ravaged nations after World War II through a series of currency stabilization programs and infrastructure loans.^[4] The early 1970s witnessed the breakdown of the system and its replacement by a mixture of fluctuating and fixed exchange rates.^[5]

Chronology[edit source | editbeta]

Timeline of the fixed exchange rate system:^[6]

1880–1914 Classical gold standard period April 1925 United Kingdom returns to gold standard October 1929 United States stock market crashes September 1931 United Kingdom abandons gold standard July 1944 Bretton Woods conference March 1947 International Monetary Fund comes into being August 1971 United States suspends convertibility of dollar into gold – Bretton Woods system collapses December 1971 Smithsonian Agreement March 1972 European snake with 2.25% band of fluctuation allowed March 1973 Managed float regime comes into being April 1978 Jamaica Accords take effect September 1985 Plaza accord September 1992 United Kingdom and Italy abandon Exchange Rate Mechanism (ERM) August 1993 European Monetary System allows ±15% fluctuation in exchange rates Gold standard[edit source | editbeta]

The earliest establishment of a gold standard was in the United Kingdom in 1821 followed by Australia in 1852 and Canada in 1853. Under this system, the external value of all currencies was denominated in terms of gold with central banks ready to buy and sell unlimited quantities of gold at the fixed price. Each central bank maintained gold reserves as their official reserve asset.^[7] For example, during the “classical” gold standard period (1879–1914), the U.S. dollar was defined as 0.048 troy oz. of pure gold^[8]

Bretton Woods system[edit source | editbeta]

Following the Second World War, the Bretton Woods system (1944–1973) replaced gold with the US$ as the official reserve asset. The regime intended to combine binding legal obligations with multilateral decision-making through the International Monetary Fund (IMF). The rules of this system were set forth in the articles of agreement of the IMF and the International Bank for Reconstruction and Development. The system was a monetary order intended to govern currency relations among sovereign states, with the 44 member countries required to establish a parity of their national currencies in terms of the U.S. dollar and to maintain exchange rates within 1% of parity (a "band") by intervening in their foreign exchange markets(that is, buying or selling foreign money). The U.S. dollar was the only currency strong enough to meet the rising demands for international currency transactions, and so the United States agreed both to link the dollar to gold at the rate of $35 per ounce of gold and to convert dollars into gold at that price.^[6]

Due to concerns about America's rapidly deteriorating payments situation and massive flight of liquid capital from the U.S., President Richard Nixon suspended the convertibility of the dollar into gold on 15 August 1971. In December 1971, the Smithsonian Agreement paved the way for the increase in the value of the dollar price of gold from $35.50 $38 an ounce. Speculation against the dollar in March 1973 led to the birth of the independent float, thus effectively terminating the Bretton Woods system.^[6]

Current monetary regimes[edit source | editbeta]

Since March 1973, the floating exchange rate has been followed and formally recognised by the Jamaica accord of 1978. Nations still need international reserves in order to intervene in foreign exchange marketsto balance short-run fluctuations in exchange rates.^[6] The prevailing exchange rate regime is in fact often considered as a revival of the Bretton Woods policies, namely Bretton Woods II.^[9]

Mechanism[edit source | editbeta]

Fig.1: Mechanism of fixed exchange-rate system

Under this system, the central bank first announces a fixed exchange-rate for the currency and then agrees to buy and sell the domestic currency at this value. The market equilibrium exchange rate is the rate at which supply and demand will be equal, i.e., markets will clear. In a flexible exchange rate system, this is the spot rate. In a fixed exchange-rate system, the pre-announced rate may not coincide with the market equilibrium exchange rate. The foreign central banks maintain reserves of foreign currencies and gold which they can sell in order to intervene in the foreign exchange market to make up the excess demand or take up the excess supply ^[2]

The demand for foreign exchange is derived from the domestic demand for foreign goods, services, and financial assets. The supply of foreign exchange is similarly derived from the foreign demand for goods, services, and financial assets coming from the home country. Fixed exchange-rates are not permitted to fluctuate freely or respond to daily changes in demand and supply. The government fixes the exchange value of the currency. For example, the European Central Bank (ECB) may fix its exchange rate at €1 = $1 (assuming that the euro follows the fixed exchange-rate). This is the central value or par value of the euro. Upper and lower limits for the movement of the currency are imposed, beyond which variations in the exchange rate are not permitted. The "band" or "spread" in Fig.1 is €0.4 (from €1.2 to €0.8).^[10]

Excess demand for dollars[edit source | editbeta]

Fig.2: Excess demand for dollars

Fig.2 describes the excess demand for dollars. This is a situation where domestic demand for foreign goods, services, and financial assets exceeds the foreign demand for goods, services, and financial assets from the European Union. If the demand for dollar rises from DD to D'D', excess demand is created to the extent of cd. The ECB will sell cd dollars in exchange for euros to maintain the limit within the band. Under a floating exchange rate system, equilibrium would have been achieved at e.

When the ECB sells dollars in this manner, its official dollar reserves decline and domestic money supplyshrinks. To prevent this, the ECB may purchase government bonds and thus meet the shortfall in money supply. This is called sterilized intervention in the foreign exchange market. When the ECB starts running out of reserves, it may also devalue the euro in order to reduce the excess demand for dollars, i.e., narrow the gap between the equilibrium and fixed rates.

Excess supply of dollars[edit source | editbeta]

Fig.3: Excess supply of dollars

Fig.3 describes the excess supply of dollars. This is a situation where the foreign demand for goods, services, and financial assets from the European Union exceeds the European demand for foreign goods, services, and financial assets. If the supply of dollars rises from SS to S'S', excess supply is created to the extent of ab. The ECB will buy ab dollars in exchange for euros to maintain the limit within the band. Under a floating exchange rate system, equilibrium would again have been achieved at e.

When the ECB buys dollars in this manner, its official dollar reserves increase and domestic money supply expands, which may lead to inflation. To prevent this, the ECB may sell government bonds ans thus counter the rise in money supply.

When the ECB starts accumulating excess reserves, it may also revalue the euro in order to reduce the excess supply of dollars, i.e., narrow the gap between the equilibrium and fixed rates. This is the opposite of devaluation.

Types of fixed exchange rate systems[edit source | editbeta] The gold standard[edit source | editbeta]

Under the gold standard, a country’s government declares that it will exchange its currency for a certain weight in gold. In a pure gold standard, a country’s government declares that it will freely exchange currency for actual gold at the designated exchange rate. This "rule of exchange” allows anyone to go the central bank and exchange coins or currency for with pure gold or vice versa. The gold standard works on the assumption that there are no restrictions on capital movements or export of gold by private citizens across countries.

Because the central bank must always be prepared to give out gold in exchange for coin and currency upon demand, it must maintain gold reserves. Thus, this system ensures that the exchange rate between currencies remains fixed. For example, under this standard, a £1 gold coin in the United Kingdom contained 113.0016 grains of pure gold, while a $1 gold coin in the United States contained 23.22 grains. The mint parity or the exchange rate was thus: R = $/£ = 113.0016/23.22 = 4.87.^[6] The main argument in favour of the gold standard is that it ties the world price level to the world supply of gold, thus preventing inflation unless there is a gold discovery (a gold rush, for example).

Price specie flow mechanism[edit source | editbeta]

The automatic adjustment mechanism under the gold standard is the price specie flow mechanism, which operates so as to correct any balance of payments disequilibria and adjust to shocks or changes. This mechanism was originally introduced by Richard Cantillon and later discussed by David Hume in 1752 to refute the mercantilist doctrines and emphasize that nations could not continuously accumulate gold by exporting more than their imports.

The assumptions of this mechanism are:

1. Prices are flexible
2. All transactions take place in gold
3. There is a fixed supply of gold in the world
4. Gold coins are minted at a fixed parity in each country
5. There are no banks and no capital flows

Adjustment under a gold standard involves the flow of gold between countries resulting in equalization of prices satisfying purchasing power parity, and/or equalization of rates of return on assets satisfyinginterest rate parity at the current fixed exchange rate. Under the gold standard, each country's money supply consisted of either gold or paper currency backed by gold. Money supply would hence fall in the deficit nation and rise in the surplus nation. Consequently, internal prices would fall in the deficit nation and rise in the surplus nation, making the exports of the deficit nation more competitive than those of the surplus nations. The deficit nation's exports would be encouraged and the imports would be discouraged till the deficit in the balance of payments was eliminated.^[11]

In brief:

Deficit nation: Lower money supply → Lower internal prices → More exports, less imports → Elimination of deficit

Surplus nation: Higher money supply → Higher internal prices → Less exports, more imports → Elimination of surplus

Reserve currency standard[edit source | editbeta]

In a reserve currency system, the currency of another country performs the functions that gold has in a gold standard. A country fixes its own currency value to a unit of another country’s currency, generally a currency that is prominently used in international transactions or is the currency of a major trading partner. For example, suppose India decided to fix its currency to the dollar at the exchange rate E₹/$ = 45.0. To maintain this fixed exchange rate, the Reserve Bank of India would need to hold dollars on reserve and stand ready to exchange rupees for dollars (or dollars for rupees) on demand at the specified exchange rate. In the gold standard the central bank held gold to exchange for its own currency, with a reserve currency standard it must hold a stock of the reserve currency.

Currency board arrangements are the most widespread means of fixed exchange rates. Under this, a nation rigidly pegs its currency to a foreign currency, Special drawing rights (SDR) or a basket of currencies. The central bank's role in the country's monetary policy is therefore minimal. CBAs have been operational in many nations like

• Hong Kong (since 1983);
• Argentina (1991 to 2001);
• Estonia (1992 to 2010);
• Lithuania (since 1994);
• Bosnia and Herzegovina (since 1997);
• Bulgaria (since 1997);
• Bermuda (since 1972);
• Denmark (since 1945);
• Brunei (since 1967) ^[12]

Gold exchange standard[edit source | editbeta]

The fixed exchange rate system set up after World War II was a gold-exchange standard, as was the system that prevailed between 1920 and the early 1930s.^[13] A gold exchange standard is a mixture of a reserve currency standard and a gold standard. Its characteristics are as follows:

• All non-reserve countries agree to fix their exchange rates to the chosen reserve at some announced rate and hold a stock of reserve currency assets.
• The reserve currency country fixes its currency value to a fixed weight in gold and agrees to exchange on demand its own currency for gold with other central banks within the system, upon demand.

Unlike the gold standard, the central bank of the reserve country does not exchange gold for currency with the general public, only with other central banks.

Hybrid exchange rate systems[edit source | editbeta]

The current state of foreign exchange markets does not allow for the rigid system of fixed exchange rates. At the same time, freely floating exchange rates expose a country to volatility in exchange rates. Hybrid exchange rate systems have evolved in order to combine the characteristics features of fixed and flexible exchange rate systems. They allow fluctuation of the exchange rates without completely exposing the currency to the flexibility of a free float.

Basket-of-currencies[edit source | editbeta]

Countries often have several important trading partners or are apprehensive of a particular currency being too volatile over an extended period of time. They can thus choose to peg their currency to a weighted average of several currencies (also known as a currency basket) . For example, a composite currency may be created consisting of hundred rupees, 100 Japanese yen and one U.S. dollar the country creating this composite would then need to maintain reserves in one or more of these currencies to satisfy excess demand or supply of its currency in the foreign exchange market.

A popular and widely used composite currency is the SDR, which is a composite currency created by theInternational Monetary Fund (IMF), consisting of a fixed quantity of U.S. dollars, euros, Japanese yen, and British pounds.

Crawling pegs[edit source | editbeta]

In a crawling peg system a country fixes its exchange rate to another currency or basket of currencies. This fixed rate is changed from time to time at periodic intervals with a view to eliminating exchange rate volatility to some extent without imposing the constraint of a fixed rate. Crawling pegs are adjusted gradually, thus avoiding the need for interventions by the central bank (though it may still choose to do so in order to maintain the fixed rate in the event of excessive fluctuations).

Pegged within a band[edit source | editbeta]

A currency is said to be pegged within a band when the central bank specifies a central exchange rate with reference to a single currency, a cooperative arrangement, or a currency composite. It also specifies a percentage allowable deviation on both sides of this central rate. Depending on the band width, the central bank has discretion in carrying out its monetary policy. The band itself may be a crawling one, which implies that the central rate is adjusted periodically. Bands may be symmetrically maintained around a crawling central parity (with the band moving in the same direction as this parity does). Alternatively, the band may be allowed to widen gradually without any pre-announced central rate.

Currency boards[edit source | editbeta]

A currency board (also known as 'linked exchange rate system")effectively replaces the central bank through a legislation to fix the currency to that of another country. The domestic currency remains perpetually exchangeable for the reserve currency at the fixed exchange rate. As the anchor currency is now the basis for movements of the domestic currency, the interest rates and inflation in the domestic economy would be greatly influenced by those of the foreign economy to which the domestic currency is tied. The currency board needs to ensure the maintenance of adequate reserves of the anchor currency. It is a step away from officially adopting the anchor currency (termed as dollarization or euroization).

Dollarization/euroization[edit source | editbeta]

This is the most extreme and rigid manner of fixing exchange rates as it entails adopting the currency of another country in place of its own. The most prominent example is the eurozone, where 17 seventeenEuropean Union (EU) member states have adopted the euro (€) as their common currency. Their exchange rates are effectively fixed to each other. There are similar examples of countries adopting the U.S. dollar as their domestic currency- British Virgin Islands, Caribbean Netherlands, East Timor,Ecuador, El Salvador, Marshall Islands, Federated States of Micronesia, Palau, Panama, Turks and Caicos Islands.

Advantages[edit source | editbeta]

• A fixed exchange rate may minimize instabilities in real economic activity^[14]
• Central banks can acquire credibility by fixing their country's currency to that of a more disciplined nation ^[14]
• On a microeconomic level, a country with poorly developed or illiquid money markets may fix their exchange rates to provide its residents with a synthetic money market with the liquidity of the markets of the country that provides the vehicle currency^[14]
• A fixed exchange rate reduces volatility and fluctuations in relative prices
• It eliminates exchange rate risk by reducing the associated uncertainty
• It imposes discipline on the monetary authority
• International trade and investment flows between countries are facilitated
• Speculation in the currency markets is likely to be less destabilizing under a fixed exchange rate system than it is in a flexible one, since it does not amplify fluctuations resulting from business cycles
• Fixed exchange rates impose a price discipline on nations with higher inflation rates than the rest of the world, as such a nation is likely to face persistent deficits in its balance of payments and loss of reserves ^[6]

Disadvantages[edit source | editbeta]

• The need for a fixed exchange rate regime is challenged by the emergence of sophisticated derivatives and financial tools in recent years, which allow firms to hedge exchange rate fluctuations
• The announced exchange rate may not coincide with the market equilibrium exchange rate, thus leading to excess demand or excess supply
• The central bank needs to hold stocks of both foreign and domestic currencies at all times in order to adjust and maintain exchange rates and absorb the excess demand or supply
• Fixed exchange rate does not allow for automatic correction of imbalances in the nation's balance of payments since the currency cannot appreciate/depreciate as dictated by the market
• It fails to identify the degree of comparative advantage or disadvantage of the nation and may lead to inefficient allocation of resources throughout the world
• There exists the possibility of policy delays and mistakes in achieving external balance
• The cost of government intervention is imposed upon the foreign exchange market ^[6]

See also[edit source | editbeta]

• Exchange rate regime
• Floating exchange rate
• Gold standard
• Bretton Woods system
• Nixon Shock
• Smithsonian Agreement
• Foreign exchange fixing

[calkid11]

YES VOMER, I hope so too , but have to keep up with the way they work there. Our days is months to them it seems...

[TBomb]

Representative: economic policy the Central Bank failed to maintain the value of the Iraqi dinar
The fourth estate Agency-23/08/2013-2: 07 pm | Hits: 7

Representative: economic policy the Central Bank failed to maintain the value of the Iraqi dinar

Secret / Baghdad
He said the parliamentary Economic Committee decision mahma Khalil, the Central Bank's policy to maintain the dinar against foreign currencies.
Khalil said in a statement Friday, "the Central Bank is required to maintain the exchange rate of the Iraqi dinar, and specify a fixed price for foreign currency, or it may be there is a sovereign Iraqi asset exceeds 70 billion dollars, and the Iraqi dinar price of over 1,200 dinars to the dollar, and sometimes brings about that price on the black market. "
"The policy of the Central Bank failed to maintain the exchange rate of the Iraqi dinar to a basket of foreign currencies."
Khalil said that "the dollar exchange rate for the dinar depends on several things, including the Iraqi sovereign dollar balance, and there are reasons not directly affected by the value of the dinar up & down on the Iraqi political climate which repel foreign currency rather attractive. "
"The Government interventions in the political Bank, adding that willingness and seriousness to transform remittances and financial deposits to the hard currency and not deposited in Iraqi banks are part of the reasons leading to the fluctuating dinar against the dollar, and there is indirect secondary causes , including international sanctions on Syria and Iran, and the Iraqi Central trader trader trying to deal with all countries of the world.
And the decision of the Commission to "dismiss today's dollar deposits is not the actual size needed by the market." / End /

 

http://www.alrafedain.net/index.php?show=news&action=article&id=107954

[SocalDinar]

 

 It has been going for years like 10 years and will continue..I've been in this so call investment for 10 years and its the same ole story year in and year out. WOW

 

But at ten years you have still made money, unlike many here who bought into this in the last 4 years. 

Thanks Yota!  Hang in there

[shellfish]

 

How do they expect the dinar to stay fixed against the foreign currencies, of course its going to fluctuate. So, let it float.  

 

A fixed exchange-rate system (also known as pegged exchange rate system) is a currency system in which governments try to maintain their currency value constant against one another.^[1] In a fixed exchange-rate system, a country’s government decides the worth of its currency in terms of either a fixed weight of gold, a fixed amount of another currency or a basket of other currencies. The central bank of a country remains committed at all times to buy and sell its currency at a fixed price. The central bank provides foreign currency needed to finance payments imbalances.

 

 

History[edit source | editbeta]

The gold standard or gold exchange standard of fixed exchange rates prevailed from about 1870 to 1914, before which many countries followed bimetallism.^[3] The period between the two world wars was transitory, with the Bretton Woods system emerging as the new fixed exchange rate regime in the aftermath of World War II. It was formed with an intent to rebuild war-ravaged nations after World War II through a series of currency stabilization programs and infrastructure loans.^[4] The early 1970s witnessed the breakdown of the system and its replacement by a mixture of fluctuating and fixed exchange rates.^[5]

Chronology[edit source | editbeta]

Timeline of the fixed exchange rate system:^[6]

1880–1914

Classical gold standard period

April 1925

United Kingdom returns to gold standard

October 1929

United States stock market crashes

September 1931

United Kingdom abandons gold standard

July 1944

Bretton Woods conference

March 1947

International Monetary Fund comes into being

August 1971

United States suspends convertibility of dollar into gold – Bretton Woods system collapses

December 1971

Smithsonian Agreement

March 1972

European snake with 2.25% band of fluctuation allowed

March 1973

Managed float regime comes into being

April 1978

Jamaica Accords take effect

September 1985

Plaza accord

September 1992

United Kingdom and Italy abandon Exchange Rate Mechanism (ERM)

August 1993

European Monetary System allows ±15% fluctuation in exchange rates

Gold standard[edit source | editbeta]

The earliest establishment of a gold standard was in the United Kingdom in 1821 followed by Australia in 1852 and Canada in 1853. Under this system, the external value of all currencies was denominated in terms of gold with central banks ready to buy and sell unlimited quantities of gold at the fixed price. Each central bank maintained gold reserves as their official reserve asset.^[7] For example, during the “classical” gold standard period (1879–1914), the U.S. dollar was defined as 0.048 troy oz. of pure gold^[8]

Bretton Woods system[edit source | editbeta]

Following the Second World War, the Bretton Woods system (1944–1973) replaced gold with the US$ as the official reserve asset. The regime intended to combine binding legal obligations with multilateral decision-making through the International Monetary Fund (IMF). The rules of this system were set forth in the articles of agreement of the IMF and the International Bank for Reconstruction and Development. The system was a monetary order intended to govern currency relations among sovereign states, with the 44 member countries required to establish a parity of their national currencies in terms of the U.S. dollar and to maintain exchange rates within 1% of parity (a "band") by intervening in their foreign exchange markets(that is, buying or selling foreign money). The U.S. dollar was the only currency strong enough to meet the rising demands for international currency transactions, and so the United States agreed both to link the dollar to gold at the rate of $35 per ounce of gold and to convert dollars into gold at that price.^[6]

Due to concerns about America's rapidly deteriorating payments situation and massive flight of liquid capital from the U.S., President Richard Nixon suspended the convertibility of the dollar into gold on 15 August 1971. In December 1971, the Smithsonian Agreement paved the way for the increase in the value of the dollar price of gold from $35.50 $38 an ounce. Speculation against the dollar in March 1973 led to the birth of the independent float, thus effectively terminating the Bretton Woods system.^[6]

Current monetary regimes[edit source | editbeta]

Since March 1973, the floating exchange rate has been followed and formally recognised by the Jamaica accord of 1978. Nations still need international reserves in order to intervene in foreign exchange marketsto balance short-run fluctuations in exchange rates.^[6] The prevailing exchange rate regime is in fact often considered as a revival of the Bretton Woods policies, namely Bretton Woods II.^[9]

Mechanism[edit source | editbeta]

Fig.1: Mechanism of fixed exchange-rate system

Under this system, the central bank first announces a fixed exchange-rate for the currency and then agrees to buy and sell the domestic currency at this value. The market equilibrium exchange rate is the rate at which supply and demand will be equal, i.e., markets will clear. In a flexible exchange rate system, this is the spot rate. In a fixed exchange-rate system, the pre-announced rate may not coincide with the market equilibrium exchange rate. The foreign central banks maintain reserves of foreign currencies and gold which they can sell in order to intervene in the foreign exchange market to make up the excess demand or take up the excess supply ^[2]

The demand for foreign exchange is derived from the domestic demand for foreign goods, services, and financial assets. The supply of foreign exchange is similarly derived from the foreign demand for goods, services, and financial assets coming from the home country. Fixed exchange-rates are not permitted to fluctuate freely or respond to daily changes in demand and supply. The government fixes the exchange value of the currency. For example, the European Central Bank (ECB) may fix its exchange rate at €1 = $1 (assuming that the euro follows the fixed exchange-rate). This is the central value or par value of the euro. Upper and lower limits for the movement of the currency are imposed, beyond which variations in the exchange rate are not permitted. The "band" or "spread" in Fig.1 is €0.4 (from €1.2 to €0.8).^[10]

Excess demand for dollars[edit source | editbeta]

Fig.2: Excess demand for dollars

Fig.2 describes the excess demand for dollars. This is a situation where domestic demand for foreign goods, services, and financial assets exceeds the foreign demand for goods, services, and financial assets from the European Union. If the demand for dollar rises from DD to D'D', excess demand is created to the extent of cd. The ECB will sell cd dollars in exchange for euros to maintain the limit within the band. Under a floating exchange rate system, equilibrium would have been achieved at e.

When the ECB sells dollars in this manner, its official dollar reserves decline and domestic money supplyshrinks. To prevent this, the ECB may purchase government bonds and thus meet the shortfall in money supply. This is called sterilized intervention in the foreign exchange market. When the ECB starts running out of reserves, it may also devalue the euro in order to reduce the excess demand for dollars, i.e., narrow the gap between the equilibrium and fixed rates.

Excess supply of dollars[edit source | editbeta]

Fig.3: Excess supply of dollars

Fig.3 describes the excess supply of dollars. This is a situation where the foreign demand for goods, services, and financial assets from the European Union exceeds the European demand for foreign goods, services, and financial assets. If the supply of dollars rises from SS to S'S', excess supply is created to the extent of ab. The ECB will buy ab dollars in exchange for euros to maintain the limit within the band. Under a floating exchange rate system, equilibrium would again have been achieved at e.

When the ECB buys dollars in this manner, its official dollar reserves increase and domestic money supply expands, which may lead to inflation. To prevent this, the ECB may sell government bonds ans thus counter the rise in money supply.

When the ECB starts accumulating excess reserves, it may also revalue the euro in order to reduce the excess supply of dollars, i.e., narrow the gap between the equilibrium and fixed rates. This is the opposite of devaluation.

Types of fixed exchange rate systems[edit source | editbeta]

The gold standard[edit source | editbeta]

Under the gold standard, a country’s government declares that it will exchange its currency for a certain weight in gold. In a pure gold standard, a country’s government declares that it will freely exchange currency for actual gold at the designated exchange rate. This "rule of exchange” allows anyone to go the central bank and exchange coins or currency for with pure gold or vice versa. The gold standard works on the assumption that there are no restrictions on capital movements or export of gold by private citizens across countries.

Because the central bank must always be prepared to give out gold in exchange for coin and currency upon demand, it must maintain gold reserves. Thus, this system ensures that the exchange rate between currencies remains fixed. For example, under this standard, a £1 gold coin in the United Kingdom contained 113.0016 grains of pure gold, while a $1 gold coin in the United States contained 23.22 grains. The mint parity or the exchange rate was thus: R = $/£ = 113.0016/23.22 = 4.87.^[6] The main argument in favour of the gold standard is that it ties the world price level to the world supply of gold, thus preventing inflation unless there is a gold discovery (a gold rush, for example).

Price specie flow mechanism[edit source | editbeta]

The automatic adjustment mechanism under the gold standard is the price specie flow mechanism, which operates so as to correct any balance of payments disequilibria and adjust to shocks or changes. This mechanism was originally introduced by Richard Cantillon and later discussed by David Hume in 1752 to refute the mercantilist doctrines and emphasize that nations could not continuously accumulate gold by exporting more than their imports.

The assumptions of this mechanism are:

1. Prices are flexible
3. All transactions take place in gold
5. There is a fixed supply of gold in the world
7. Gold coins are minted at a fixed parity in each country
9. There are no banks and no capital flows

Adjustment under a gold standard involves the flow of gold between countries resulting in equalization of prices satisfying purchasing power parity, and/or equalization of rates of return on assets satisfyinginterest rate parity at the current fixed exchange rate. Under the gold standard, each country's money supply consisted of either gold or paper currency backed by gold. Money supply would hence fall in the deficit nation and rise in the surplus nation. Consequently, internal prices would fall in the deficit nation and rise in the surplus nation, making the exports of the deficit nation more competitive than those of the surplus nations. The deficit nation's exports would be encouraged and the imports would be discouraged till the deficit in the balance of payments was eliminated.^[11]

In brief:

Deficit nation: Lower money supply → Lower internal prices → More exports, less imports → Elimination of deficit

Surplus nation: Higher money supply → Higher internal prices → Less exports, more imports → Elimination of surplus

Reserve currency standard[edit source | editbeta]

In a reserve currency system, the currency of another country performs the functions that gold has in a gold standard. A country fixes its own currency value to a unit of another country’s currency, generally a currency that is prominently used in international transactions or is the currency of a major trading partner. For example, suppose India decided to fix its currency to the dollar at the exchange rate E₹/$ = 45.0. To maintain this fixed exchange rate, the Reserve Bank of India would need to hold dollars on reserve and stand ready to exchange rupees for dollars (or dollars for rupees) on demand at the specified exchange rate. In the gold standard the central bank held gold to exchange for its own currency, with a reserve currency standard it must hold a stock of the reserve currency.

Currency board arrangements are the most widespread means of fixed exchange rates. Under this, a nation rigidly pegs its currency to a foreign currency, Special drawing rights (SDR) or a basket of currencies. The central bank's role in the country's monetary policy is therefore minimal. CBAs have been operational in many nations like

• Hong Kong (since 1983);
• Argentina (1991 to 2001);
• Estonia (1992 to 2010);
• Lithuania (since 1994);
• Bosnia and Herzegovina (since 1997);
• Bulgaria (since 1997);
• Bermuda (since 1972);
• Denmark (since 1945);
• Brunei (since 1967) ^[12]

Gold exchange standard[edit source | editbeta]

The fixed exchange rate system set up after World War II was a gold-exchange standard, as was the system that prevailed between 1920 and the early 1930s.^[13] A gold exchange standard is a mixture of a reserve currency standard and a gold standard. Its characteristics are as follows:

• All non-reserve countries agree to fix their exchange rates to the chosen reserve at some announced rate and hold a stock of reserve currency assets.
• The reserve currency country fixes its currency value to a fixed weight in gold and agrees to exchange on demand its own currency for gold with other central banks within the system, upon demand.

Unlike the gold standard, the central bank of the reserve country does not exchange gold for currency with the general public, only with other central banks.

Hybrid exchange rate systems[edit source | editbeta]

The current state of foreign exchange markets does not allow for the rigid system of fixed exchange rates. At the same time, freely floating exchange rates expose a country to volatility in exchange rates. Hybrid exchange rate systems have evolved in order to combine the characteristics features of fixed and flexible exchange rate systems. They allow fluctuation of the exchange rates without completely exposing the currency to the flexibility of a free float.

Basket-of-currencies[edit source | editbeta]

Countries often have several important trading partners or are apprehensive of a particular currency being too volatile over an extended period of time. They can thus choose to peg their currency to a weighted average of several currencies (also known as a currency basket) . For example, a composite currency may be created consisting of hundred rupees, 100 Japanese yen and one U.S. dollar the country creating this composite would then need to maintain reserves in one or more of these currencies to satisfy excess demand or supply of its currency in the foreign exchange market.

A popular and widely used composite currency is the SDR, which is a composite currency created by theInternational Monetary Fund (IMF), consisting of a fixed quantity of U.S. dollars, euros, Japanese yen, and British pounds.

Crawling pegs[edit source | editbeta]

In a crawling peg system a country fixes its exchange rate to another currency or basket of currencies. This fixed rate is changed from time to time at periodic intervals with a view to eliminating exchange rate volatility to some extent without imposing the constraint of a fixed rate. Crawling pegs are adjusted gradually, thus avoiding the need for interventions by the central bank (though it may still choose to do so in order to maintain the fixed rate in the event of excessive fluctuations).

Pegged within a band[edit source | editbeta]

A currency is said to be pegged within a band when the central bank specifies a central exchange rate with reference to a single currency, a cooperative arrangement, or a currency composite. It also specifies a percentage allowable deviation on both sides of this central rate. Depending on the band width, the central bank has discretion in carrying out its monetary policy. The band itself may be a crawling one, which implies that the central rate is adjusted periodically. Bands may be symmetrically maintained around a crawling central parity (with the band moving in the same direction as this parity does). Alternatively, the band may be allowed to widen gradually without any pre-announced central rate.

Currency boards[edit source | editbeta]

A currency board (also known as 'linked exchange rate system")effectively replaces the central bank through a legislation to fix the currency to that of another country. The domestic currency remains perpetually exchangeable for the reserve currency at the fixed exchange rate. As the anchor currency is now the basis for movements of the domestic currency, the interest rates and inflation in the domestic economy would be greatly influenced by those of the foreign economy to which the domestic currency is tied. The currency board needs to ensure the maintenance of adequate reserves of the anchor currency. It is a step away from officially adopting the anchor currency (termed as dollarization or euroization).

Dollarization/euroization[edit source | editbeta]

This is the most extreme and rigid manner of fixing exchange rates as it entails adopting the currency of another country in place of its own. The most prominent example is the eurozone, where 17 seventeenEuropean Union (EU) member states have adopted the euro (€) as their common currency. Their exchange rates are effectively fixed to each other. There are similar examples of countries adopting the U.S. dollar as their domestic currency- British Virgin Islands, Caribbean Netherlands, East Timor,Ecuador, El Salvador, Marshall Islands, Federated States of Micronesia, Palau, Panama, Turks and Caicos Islands.

Advantages[edit source | editbeta]

• A fixed exchange rate may minimize instabilities in real economic activity^[14]
• Central banks can acquire credibility by fixing their country's currency to that of a more disciplined nation ^[14]
• On a microeconomic level, a country with poorly developed or illiquid money markets may fix their exchange rates to provide its residents with a synthetic money market with the liquidity of the markets of the country that provides the vehicle currency^[14]
• A fixed exchange rate reduces volatility and fluctuations in relative prices
• It eliminates exchange rate risk by reducing the associated uncertainty
• It imposes discipline on the monetary authority
• International trade and investment flows between countries are facilitated
• Speculation in the currency markets is likely to be less destabilizing under a fixed exchange rate system than it is in a flexible one, since it does not amplify fluctuations resulting from business cycles
• Fixed exchange rates impose a price discipline on nations with higher inflation rates than the rest of the world, as such a nation is likely to face persistent deficits in its balance of payments and loss of reserves ^[6]

Disadvantages[edit source | editbeta]

• The need for a fixed exchange rate regime is challenged by the emergence of sophisticated derivatives and financial tools in recent years, which allow firms to hedge exchange rate fluctuations
• The announced exchange rate may not coincide with the market equilibrium exchange rate, thus leading to excess demand or excess supply
• The central bank needs to hold stocks of both foreign and domestic currencies at all times in order to adjust and maintain exchange rates and absorb the excess demand or supply
• Fixed exchange rate does not allow for automatic correction of imbalances in the nation's balance of payments since the currency cannot appreciate/depreciate as dictated by the market
• It fails to identify the degree of comparative advantage or disadvantage of the nation and may lead to inefficient allocation of resources throughout the world
• There exists the possibility of policy delays and mistakes in achieving external balance
• The cost of government intervention is imposed upon the foreign exchange market ^[6]

See also[edit source | editbeta]

• Exchange rate regime
• Floating exchange rate
• Gold standard
• Bretton Woods system
• Nixon Shock
• Smithsonian Agreement
• Foreign exchange fixing

 

Easily digested,even so took me an hour to consume. Should be mandatory reading even if only to show this is speculation not a penny stock tip. I'll make copies and stick it under my"Just do it" neighbors doors. Much thanks.

[Boozer]

This article comes out every 2 months or so, and nothing ever comes from it, it's getting old, today one thing tomorrow another, Come back next year it will be the same story,

[gregp]

It sounds like the dollar gaining power. Not the dinar. But it's late.