Currency Board


DEFINITION of 'Currency Board'

A monetary authority that makes decisions about the valuation of a nation's currency, specifically whether to peg the exchange rate of the local currency to a foreign currency, an equal amount of which is held in reserves. The currency board then allows for the unlimited exchange of the local, pegged currency for the foreign currency. A currency board can only earn the interest that is gained on the foreign reserves themselves, so those rates tend to mimic the prevailing rates in the foreign currency.

BREAKING DOWN 'Currency Board'

Like most of the world's developed economies, the United States does not have a currency board. In the U.S., the Federal Reserve is a true central bank, which operates as a lender of last resort, engaging in forward contracts and trading Treasury securities in the open market. The exchange rate is allowed to float, and is determined by market forces as well as the Fed's monetary policies. By contrast, currency boards are rather limited in their power. They essentially hold the required percentage of pegged currency that has been previously mandated, and exchange local currency for the pegged (or anchor) currency, which is typically the U.S. dollar or the euro.

  1. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  2. Currency Forward

    A binding contract in the foreign exchange market that locks ...
  3. Foreign Currency Effects

    The gain or loss on foreign investments due to changes in the ...
  4. Fixed Exchange Rate

    A country's exchange rate regime under which the government or ...
  5. Central Bank

    The entity responsible for overseeing the monetary system for ...
  6. Trade Credit

    An agreement where a customer can purchase goods on account (without ...
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