Friday, 9 October 2009

المتداول العربىCurrency Pegs back in Style

المتداول العربىCurrency Pegs back in Style
Having endured years of abuse from free-market advocates and the International Monetary Fund, fixed exchange rate regimes are officially back in vogue.

This is because the sole currencies not to have been affected by the recent surge in forex volatility are those that are pegged to the US Dollar, namely the Chinese Yuan and Hong Kong Dollar.

Both countries have stood by calmly as other emerging market economies have witnessed speculators lay waste to their currencies, driving them down by 5% or more per day. Fortunately, both HK and China have significant stockpiles of foreign exchange reserves, which virtually eliminates any possibility of a speculative attack.

Iceland, meanwhile, was forced to abandon a half-hearted attempt at a currency peg when it ran out of cash to defend it.

Of course, a fixed currency can also be a disadvantage, as exports may become expensive relative to competitors that experience declines in their currencies.

Given the current economic climate, however, it seems HK is happy to give up this potential upside in favor of stability.

The Wall Street Journal reports:
Like Japan, Hong Kong was a source of funds for the carry-trade.

Turbulent markets have taken that strategy apart, and investors who borrowed in Hong Kong are pulling money back into the territory at a rapid clip.