Does buying dollars preserve a country's currency's exchange rate?
Does buying dollars preserve a country's currency's exchange rate?
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shea · External communityPost link
External question — Economics Stack Exchange
Author: shea
Original post: https://economics.stackexchange.com/questions/57529
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On pg. 10 of Emmanuel's
Profit and Crises
, he says "ever since the dollar standard was set up, no country could cease buying all the dollars offered to it without effectively revaluing its currency".
In the context of the international dollar standard, why would a country ceasing to buy dollars result in its national currency's revaluation?
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1muflon1 · External communityPost link
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Author: 1muflon1
Original post: https://economics.stackexchange.com/a/57530
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In a floating exchange rate system, that today most countries have, the statement would not hold.
Under former Breton-Woods system all members pegged their currency at an de facto fixed exchange rate to US dollar (de jure they were allowed to float within
$\pm 1\%$
, see
Fed 2013
).
If a country is on fixed exchange rate, like for example 1USD = 1 local currency, then this fixed exchange can only be sustainable if local central bank is willing to always guarantee to buy 1 USD for 1 local currency.
If central bank wouldn’t do that then a black market would develop where price would be determined by market forces as opposed to the fixed exchange that is simply set by state. Hence if the central bank wants to keep the peg it has to be willing to purchase any amount of currency at that rate when push comes to shove. Alternatively central bank can reevaluate the currency to some sustainable value (although this new value will still have to be supported by central bank willing to purchase any amount of currency at this new value).
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Quoted from Forex.com.bd-Editorial External answer — Economics Stack Exchange Author: 1muflon1 Source score (net votes, not local likes): 0 Original post: https://economics.stackexchange.com/a/57530 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. In a floating exchange rate system, that today most countries have, the statement would not hold. Under former Breton-Woods system all members pegged their currency at an de facto fixed exchange rate to US dollar (de jure they were allowed to float within $\pm 1\%$ , see Fed 2013 ). If a country is on fixed exchange rate, like for example 1USD = 1 local currency, then this fixed exchange can only be sustainable if local central bank is willing to always guarantee to buy 1 USD for 1 local currency. If central bank wouldn’t do that then a black market would develop where price would be determined by market forces as opposed to the fixed exchange that is simply set by state. Hence if the central bank wants to keep the peg it has to be willing to purchase any amount of currency at that rate when push comes to shove. Alternatively central bank can reevaluate the currency to some sustainable value (although this new value will still have to be supported by central bank willing to purchase any amount of currency at this new value).
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