What Currencies Are Pegged to the Dollar?
In a free market system, the value of a currency rises and falls depending on the value of what is supporting it, whether it's gold or the economic output of an economy. But even dyed-in-the-wool, arch conservatives see some wisdom in maintaining currency pegs, which link movement in one currency to movement in another.
Function
The purpose of a currency peg is to facilitate international trade and foster economic growth. Companies that do international business usually have to account for fluctuations in currency as either a cost or benefit of doing business. For example, selling products in a currency that is gaining value increases profits when converted back into the domestic currency. But the opposite is also true. Currency pegs provide consistency and reliability, often essential prerequisites to the investment of large sums.
Features
A currency peg, also known as a fixed interest rate, can be set by fiat, which is to say it is simply made illegal to exchange at any other rate. More often, however, currency pegs are accompanied by a corresponding monetary policy through open market operations with reserves of the currency to which they are pegged. If there is too much of it circulating, the law of supply and demand dictates the value of the currency will decline. The supply is too great. In response, the country exchanges reserves of the peg currency for its own, which it takes off the market. If the supply is too small, the country puts new money into circulation by buying the reserve currency.
Types
While it's feasible to peg currencies at a 1:1 ratio, this is very rare. In most cases the currency is pegged at some other ratio, usually reflecting the exchange rate at the time the peg is established or some target. It's also possible to peg a currency to a basket of currencies, which provides the stability of diversity. China, for example, altered its strict currency peg in 2005 to permit a gradual appreciation against a group of currencies.
Significance
Currency pegs are usually undertaken by small countries and those whose economies are based on exports. The dollar became the world's reserve currency after WWII because represented the largest physical gold reserves. As those reserves dwindled and currencies left the gold standard, the fact crude oil is priced primarily in U.S. dollars on most exchanges helped maintain a constant demand for dollars around the world and reaffirm the dollar's status as the world's reserve currency. Countries that primarily export oil or have direct trade with the U.S. as a major component of their GDP are the most likely to have a U.S. dollar peg.
Potential
When a currency loses value, prices tend to rise in a phenomenon called "inflation" and currencies pegged to the declining currency also succumb to price inflation. The huge decline in the value of the dollar in the last half of the 20th century and the acute depreciation between 2005 and 2008 caused several countries to rethink their dollar pegs. Some, such as Syria, have instead moved towards diversified reserves including euros and gold. Some oil bourses have even contemplated pricing in local currencies and euros in addition to dollar, eroding demand for dollars. Though the dollar appreciated in the last half of 2008, many speculated further declines would ensue as a result of the huge economic stimulus and bailout packages aimed at the credit crisis.
Time Frame
As the actions of China and Syria indicate, no list of pegged currencies can always be accurate. Nevertheless, as of 2008, there were at least 17 national currencies pegged to the U.S. currency, not counting other organizations that maintain a similar link. These include the Netherlands Antillean guilder, Aruban florin, Jordanian dinar, Bahrain's dinar, Lebanon's pound, Oman's rial, Qatar's rial, the Saudi riyal, Emirati dirham, Maldivian rufiyaa, Venezuelan bolivar, the Belize dollar, the Bahamian dollar, the Hong Kong dollar, the Barbados dollar, the Trinidad and Tobago dollar, and the Eastern Caribbean dollar, which is used by Antigua, Dominica, St. Kitts, St. Lucia, St. Vincent, the Grenadines and Grenada.
