Hybrids

Hybrids

Published:   12 Dec at 9 AM

By:Admin

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The reality of the use of these exchange
rate is that it's rare to find one that is entirely floating or entirely
pegged but rather it is much more common to find one that is a combination
of the two. One way of doing this is for a country using a traditional
pegged system can prevent the typical market panics and the potential
inflation economic disasters by using what is known as a floating peg.
To do this, the nation concerned would peg their exchange rate to the
United States dollar which whilst obviously having minor fluctuations,
is generally a very solid currency that only changes a tiny amount from
day to day. Importantly, however, the nations ruling body, regularly
reviews the peg at predetermined times during the year whether it be
bi-monthly, quarterly or even every month, which enables them to ensure
it is kept at a similar level to it's true market value and if necessary,
make minor amendments in order to achieve this.

Similarly though, floating exchange
rate systems couldn't really be described as being left to the mercy
of market forces either. Some of the governments that implement these
floating exchange rate systems, make adjustments to their domestic and
international economic policies which can have a direct or indirect
impact on the value of their currency and exchange rates.

Other important economic events such
as tax cuts, fluctuations in the country's interest rate and even
less directly such as import tariffs can all have an impact on the value
of a country's currency despite the fact that officially the value
floats. The interest rate affects the market because when a country
raises its interest rates, people will begin to shift their assets and
investments over to that country to benefit from this increased interest
rates and increase profits. To do this, the investors are required to
purchase that country's currency which in turn increases the demand
for the currency whilst the supply remains the same. The obvious result
of this is that the value of the currency increases due to the increased
demand for it.

So whilst most people, whether they
are traders, businesses or just holidaymakers visiting foreign countries,
don't really think about the details behind the rise and fall of a
currency it is the economic movements throughout the world that define
the exact value of a currency. It is important to remember that when
you trade a currency, you are becoming one of these economic movements
and you are having an impact on the exchange rate. By purchasing a currency
using another currency, you are increasing the supply of one and increasing
the demand for another which as discussed are the two things that affect
the exchange rates.

« Exchange Rates - What are they and how are they calculated?

Bilateral vs. effective exchange rate »