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Why Governments Use Fixed Currency Rates?

Just about all major world currencies change freely on the international exchange market, in distinction to the so-called “pegged currencies”, which are associated with another major currency. Both common types of a fixed rate foreign exchange regime incorporate a fixed and unconvertible exchange rate, and a fixed and collapsible exchange rate. The first method of fixing the exchange rate involves evaluation on the free change of the local foreign currency into a foreign money while the second one features free market for foreign exchange but corrects the exchange rates of the local currency. crypto coins

The pegged currencies cannot drift freely on the overseas exchange market and their currency rates fluctuate in conjunction to the changes of the camp currency. Hence, a currency pegged to the euro will follow all moves of the single European currency on the Forex markets. Many of these a system offers basic prevention of collapses of the currency rates of the local currency but makes it dependent on another currency with all the risks related to an unexpected weakening of the base currency. 

Competitors of the fixed rate exchange regimes argue that they are in conundrum to the basics of the free market system, hence, they are bad and dangerous in times of financial crisis because such a foreign exchange regime does not provide shelter for the local currency. The free-floating stock markets are more able to adapt to financial market shocks, critics insist. One more disadvantageous factor of the fixed exchange rate is that the government is forced to keep large forex trading reserves to maintain the fixed currency rate levels.

Among the list of features of the predetermined forex regime is the increased confidence of the investors in the particular currency and the diminished trade and investment dangers due to the insufficient fluctuations in the foreign currency rates. Theorists claim that a set exchange rate also suppresses inflation, which is a curse for doing business and inhibits entrepreneurs from long-term planning.

Usually, the fixed exchange rate is considered a momentary measure for stabilisation of the local economy or as a tool utilized in preparation for major monetary reforms. However, there are countries in Europe, whoever currencies have been chosen for years without creating any risk to the local economies. Alternatively, the most restrictive fixed rate overseas exchange regimes can be observed among the less economically developed nations and there is no proof that introduction of such regulations boosted the neighborhood companies, analysts comment.

The benefits and disadvantages of the free floating and fixed forex rates have been subject matter of debate for years but the widespread judgment is that the floating exchange rate is more beneficial for almost all of the developed market economies. Some experts believe the fixed forex rate is an old fashioned concept but it could be an useful tool if a government is without other choice but to peg its currency to an important world currency to protect their economies.

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