Linked Exchange Rate System

Definition of 'Linked Exchange Rate System'


A system of managing a nation's currency and exchange rate by linking the national currency to another base currency that is held at a fixed ratio in deposit at domestic banks.

Once the exchange rate is set, there is typically no interference from the government or through monetary policy decisions that will affect the exchange rate. Currency is only issued when there are reserves in the linked currency to back it up. If the exchange rate begins to shift from the fixed ratio, currency is immediately added to or taken out of circulation to bring the ratio back into balance.

Investopedia explains 'Linked Exchange Rate System'


This is different from simply pegging one currency to another; in a linked exchange rate system, currency can only be issued when confirmed reserves in the linked currency are held at local banking institutions. In Hong Kong, for example, this means that every Hong Kong dollar that is floating around in the economy is backed by several U.S. dollars held in reserve.

The advantage of this system is that it stabilizes the currency and keeps inflation ultra low. On the downside, the nation using it can't leverage advantages in trading with foreign partners, and can't implement monetary policy to adapt to shifts in the domestic economy.



comments powered by Disqus
Hot Definitions
  1. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  2. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  3. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  4. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  5. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
  6. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
Trading Center