Fixed Exchange Rate
Candlefocus EditorThe purpose of a fixed exchange rate system is to keep a currency’s value within a set range or band and to prevent large swings in the exchange rate, which could lead to high inflation. Fixed exchange rates also provide greater certainty for exporters, importers, and other international business transactions, which helps to ensure stability in the global economy and promote economic growth.
In the past, many countries relied on the gold standard and had their currency pegged to gold, meaning the value of their currency was determined by the amount of gold they held. This system was replaced by the Bretton Woods Agreement in 1944, which established the U.S. dollar as the world currency and defined exchange rates in relation to the U.S. dollar. This system was replaced in the early 1970s by the floating exchange rate system, in which the value of a currency is determined by market forces such as supply and demand.
Despite the move to the floating exchange rate system, there are still a number of countries that use a form of the fixed exchange rate system, such as Saudi Arabia, which ties its currency to the U.S. dollar, and China, which links its currency to a basket of currencies. These countries use a managed exchange rate system, where the government sets the value of their currency but allows it to fluctuate within a set range.
Overall, the purpose of the fixed exchange rate system is to provide stability and certainty to the global economy and to help the government maintain low inflation. Despite the move to the floating exchange rate system, some countries have seen benefits from using a fixed exchange rate system and continue to do so.