Why fixed exchange rate system fail

Switzerland is heading down a well-trodden path by fixing the value of its currency to stop wild gyrations. But it's a risky strategy that has failed more often than it has succeeded. Fixing, or pegging, a currency to another results in a constant exchange rate.

In Switzerland's case, the country set the value of its currency at 1. To make a peg work, a country's central bank must continually buy and sell its own currency on foreign exchange markets in return for the currency to which it is tied. Switzerland has introduced a hybrid version of pegging.

The Swiss National Bank, for example, has pledged to buy euros in "unlimited" quantities to keep the value of the franc from rising above a fixed exchange threshold. The cookies is used to store the user consent for the cookies in the category "Necessary".

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The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional". The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. In , under pressure from the U. After only six weeks the U. Thereafter, maintaining adequate reserves became a preoccupation of successive U.

The pound was eventually devalued by 30 percent in As Europe and Japan recovered from the war, international demand for dollars soared, putting pressure on the U.

In , the economist Frederic Triffin warned that international demand for dollars would mean either the U. Consequently, the United States balance of payments reflects a steady flow of gold out of the country. Over the next few years, the U. But by , foreign claims on gold exceeded the U.

By the end of March , U. To ward off a foreign exchange crisis, the U. Before repealing the fixed-rate scheme in , Chinese foreign exchange reserves grew significantly each year in order to maintain the U. The pace of growth in reserves was so rapid it took China only a couple of years to overshadow Japan's foreign exchange reserves.

The problem with huge currency reserves is that the massive amount of funds or capital that is being created can create unwanted economic side effects —namely higher inflation. The more currency reserves there are, the bigger the monetary supply , which causes prices to rise. Rising prices can cause havoc for countries that are looking to keep things stable.

These types of economic elements have caused many fixed exchange rate regimes to fail. Although these economies are able to defend themselves against adverse global situations, they tend to be exposed domestically. Many times, indecision about adjusting the peg for an economy's currency can be coupled with the inability to defend the underlying fixed rate. The Thai baht was one such currency. The baht was at one time pegged to the U. Once considered a prized currency investment, the Thai baht came under attack following adverse capital market events during The currency depreciated and the baht plunged rapidly, because the government was unwilling and unable to defend the baht peg using limited reserves.

In July , the Thai government was forced into floating the currency before accepting an International Monetary Fund bailout. Actively scan device characteristics for identification.

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