Definition
A managed currency, also known as a pegged currency, is a currency whose value is heavily regulated by the government or central bank of the issuing country. Unlike freely floating currencies that determine value through market forces, the issuing country strategically intervenes in the foreign exchange market to influence the currency’s value. These interventions may include buying or selling large amounts of the currency, altering interest rates, or other monetary policies.
Examples
- Chinese Yuan (CNY): The Chinese government often intervenes in the foreign exchange market to control the value of the yuan by pegging it to a basket of global currencies.
- Hong Kong Dollar (HKD): Managed by the Hong Kong Monetary Authority, it is pegged to the US dollar within a narrow range using a currency board system.
- Singapore Dollar (SGD): The Monetary Authority of Singapore regulates its currency, primarily through an exchange rate mechanism that adjusts the SGD against a basket of other currencies.
Frequently Asked Questions
1. Why do countries manage their currencies? Countries manage their currencies to stabilize their economic conditions and control inflation rates, ensuring a favorable trade balance and preventing excessive market volatility.
2. How is a managed currency different from a floating currency? A floating currency’s value is determined by market forces of supply and demand without intervention by the government or central bank, whereas a managed currency’s value is influenced or stabilized through strategic interventions.
3. What tools do central banks use to manage currency values? Central banks may employ foreign exchange reserves, control interest rates, engage in open market operations, and use fiscal policies to manage the value of their currencies.
4. Can a managed currency system fail? Yes, a managed currency system can fail if the country’s economic fundamentals do not support the pegged value, leading to depletion of forex reserves and unstable economic conditions.
5. Are managed currencies common in today’s global market? While less common than floating currencies, several countries, especially those in emerging markets or smaller economies, still use managed currency systems to stabilize their economic environments.
Related Terms
- Foreign Exchange Reserves: These are assets held by a central bank in foreign currencies, used to back liabilities and influence monetary policy.
- Central Bank: The authority responsible for managing a country’s currency, money supply, and interest rates.
- Pegged Exchange Rate: A fixed exchange rate system where a country’s currency value is tied to that of another currency or a basket of currencies.
- Currency Board: An exchange rate regime where a country’s exchange rate is pegged to another country’s currency and the monetary authority holds reserves to back the domestic currency.
Online References
- Investopedia: Floating Exchange Rate
- The Balance: How Central Banks Impact Exchange Rates
- IMF - Exchange Rate Policies
Suggested Books for Further Studies
- “The Economics of Exchange Rates” by Lucio Sarno and Mark P. Taylor
- “International Financial and Monetary Law” by Rosa M. Lastra
- “Foreign Exchange Markets: A Guide to Central Bank Endogenous Credit Mechanics” by Cornelius Luca
Fundamentals of Managed Currency: International Business Basics Quiz
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