How are fixed exchange rates maintained by governments?

Discussion in 'Forex' started by nooty, Sep 9, 2008.

  1. nooty


    How are pegs to the dollar maintained exactly by governments? For example, does the country buy / sell its own currency in the forex market?
  2. Yes. That's basically how it happens. Your currency goes too high, increase supply to push the price back down.
  3. nooty


    But since their currency isnt a major one, why would anyone buy it. Take Qatar for example, who would buy it in the world market when the gov't tries to sell it?
  4. Well that's the point... If you want to hold the currency down then you need to sell enough of it to fill all the bids at the current price, so the price will go lower.
  5. nooty


    But who exactly will buy it?
  6. dbuff


    countries use this as a way to form price stability. Namibia and South Africa for example. South Africa has lower inflation so pegging them together makes them one in the same really. Strength Growth is low or none, but domestically it can help a country stabilize prices..Their are arbitrage scenarios people try to play with fixed exchange rate, for example when interest rates fluctuate within the countries with fixed exchange rates. Namibia has a 3% interest rate, and South Africa has 6%, you borrow in Namibia, then take that money and make a loan in South Africa. That rarely happens anymore because they keep their policies pretty streamlined. All fixed exchange rates do is eliminate the need to worry about money supply. Its one of the things we try to control the most here, and learn how it effects our spending. Money Multipliers etc. etc. I dont think you need to worry too much about fixed exchange rates though. Fluctuations are small.