Fixed exchange rate regime… A fixed exchange rate is a regime by a government or central bank that links the country's official exchange rate to another country's currency or gold price. The purpose of the fixed exchange rate system is to keep the value of a currency within a narrow band. As these measured values rise and fall, the value of the local currency associated with them also changes. If the exchange rate exceeds the upper or lower limit line, the exchange rate is intervened. For the fixed exchange rate implementation, the country's foreign exchange reserves must be at a sufficient level and must be provided by continuous external financing.
Devaluation… If the central bank does not have enough foreign exchange to intervene in the exchange rate, it raises the exchange rate, that is, lowers the value of the national currency. In addition to this negative feature of the system, the formation of external payment imbalances due to inflation is another negative aspect of the system.
One of these typical crises is taking place in Sri Lanka. After many ministers, the head of the central bank has also resigned. The recent currency crisis in the country and the problem of access to basic necessities due to high prices have also caused social events. The country needs foreign aid.
Egypt also banned the export of basic foodstuffs such as flour, lentils and wheat for three months. The country is a wheat importer and applies a grain and bread subsidy program to avoid high prices. Subsidies are difficult to sustain as the impact of the currency crisis and high inflation intensifies.
Challenges in the current conjuncture… The wider the currency fluctuations, the more harmful it can be for international trade. On the other hand; The "devaluations" that will occur because there is no fluctuation in high food and energy prices and exchange rates will also cause economic difficulties for countries that apply a fixed exchange rate regime. Over time, growing economies will find it difficult to maintain a stable monetary policy, which will eventually snowball into the need to buy more dollars to maintain the appropriate rate.
There are still a significant number of currencies pegged to the US dollar today. In the Middle East, many countries' currencies, including Jordan, Oman, Qatar, Saudi Arabia, and the United Arab Emirates, are pegged to the US dollar for stability – oil-rich countries need the US as a major trading partner for oil. While China has not officially pegged the Chinese yuan to a currency basket that includes the US dollar, China manages the yuan's exchange rate against the dollar to benefit its export-driven economy. After the economic crisis in 2001, Turkey switched to the floating exchange rate regime, in which the exchange rates are determined according to the supply and demand conditions in the market.
Conclusion? While the fall in commodity prices has made it difficult for commodity exporters with fixed currencies to support their economies without increasing their budget deficits or reducing their foreign exchange reserves; on the contrary, the rise in commodity prices, as in the current reflection, complicates the deficits and naturally financing of the countries that are their buyers. In this case, it becomes impossible to defend the currency peg without reducing foreign exchange reserves. These economic strains can cause serious devaluation effects.
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