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Countries that peg their currency to another benchmark currency are
trying to fight normal market forces by being a buyer or seller of last
resort. For example, if more and more Brasilian Reals are printed by the
govt, the market supply-demand equation would push down the value of the
Real versus the US$. The Brasilian govt steps in and support the pegged
price by buying Reals with its own US$ reserves. If the supply-demand
imbalance is temporary in nature, this can be an effective way of
smoothing out the vagaries of the market. If the economic factors are
too large and too long in duration, the govt may begin running out of
reserves. In that case they stop serving as buyer of last resort, and
let the currency float to the true supply-demand equilibrium.
China gets the focus now as the biggest economy pegging its rate. If
those Europeans in favor of some sort of exchange rate linkage (eg,
Lafontaine in Germany) get their way, the Euro might become an object of
attention too.
This is not just something that happens to developing countries. Soros
became famous by his run on the British Pound, knocking it out of the
ERM.
Regards
DanG
HARELSDB@xxxxxxx wrote:
>
> Brazil recently "devalued" its currency and is allowing it to "float".
> There are concerns that China will "devalue" its currency and cause another
> round of Asian problems.
>
> How does a country "devalue" its currency?
>
> Thanks,
>
> Dan
> Pocatello, ID USA
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