Fixed Exchange Rate
A fixed exchange rate is a type of exchange rate regime where a currency’s value is fixed against either the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold. A fixed exchange rate is usually used to stabilize the value of a currency by directly fixing its value in a predetermined ratio to a different, more stable or more internationally prevalent currency. This makes trade and investments between the two currency areas easier and more predictable.
History of Fixed Exchange Rates
The concept of fixed exchange rates has been around since the late 19th century, when the gold standard was adopted by many countries. Under the gold standard, a country’s currency was fixed to a certain amount of gold, and the exchange rate between two currencies was determined by the amount of gold each currency could buy. This system was abandoned in the early 20th century, but the idea of fixed exchange rates was revived in the Bretton Woods Agreement of 1944. Under the Bretton Woods Agreement, most major currencies were fixed to the US dollar, which was in turn fixed to gold. This system lasted until 1971, when the US abandoned the gold standard and allowed the US dollar to float freely against other currencies.
Comparison Table
| Type of Exchange Rate | Description |
|---|---|
| Fixed Exchange Rate | A currency’s value is fixed against another currency, a basket of currencies, or a measure of value such as gold. |
| Floating Exchange Rate | A currency’s value is determined by the market forces of supply and demand. |
Summary
A fixed exchange rate is a type of exchange rate regime where a currency’s value is fixed against another currency, a basket of currencies, or a measure of value such as gold. This type of exchange rate regime is used to stabilize the value of a currency and make trade and investments between two currency areas easier and more predictable. For more information on fixed exchange rates, you can visit websites such as Investopedia, The Balance, and the International Monetary Fund.
See Also
- Floating Exchange Rate
- Currency Exchange Rate
- Exchange Rate Regime
- Currency Appreciation
- Currency Depreciation
- Currency Peg
- Currency Swap
- Currency Intervention
- Currency Crisis
- Currency Board
