From the end of World War II until around 1971, most currencies were in some form pegged (or fixed) to the U.S. dollar, which was itself fixed to gold. Beginning in the early 1970s when the Bretton Woods Fixed Exchange System collapsed, governments began floating their own currencies. Today, though, two types of currency exchange rates—floating and fixed, are still in existence. Major currencies, such as the Japanese yen, euro, and the U.S. dollar, are floating currencies—their values change according to how the currency is being traded on forex (FX) markets. Fixed currencies, on the other hand, derive value by being fixed (or pegged) to another currency. In this article, we will discuss exchange rates that continue to peg to the U.S. dollar. 

When countries participate in international trade, they need to ensure that the value of their currency remains relatively stable. Countries choose to peg their currency to safeguard the competitiveness of their exported goods and services.  A weaker currency is good for exports and tourists, as everything becomes cheaper to purchase. By pegging to the currency used by primary trade partners or to a standard or major currency, countries can ensure their goods and services remain competitive and are not impacted by the constant fluctuation of a floating currency’s exchange rate.  Many, though, chose to maintain a fixed policy and today there are still a significant number of currencies pegged to the U.S. 

(For more, see: Currency Exchange: Floating Rate Vs. Fixed Rate.)

Why Currencies Peg to the U.S. Dollar

Countries have different reasons for pegging to the dollar. Most of the Caribbean islands (Aruba, Bahamas, Barbados, and Bermuda, to name a few), peg to the U.S. dollar because their main source of income is derived from tourism paid in dollars. Fixing to the U.S. dollar stabilizes the economies and makes them less volatile. In Africa, many countries peg to the euro. Djibouti and Eritrea, pegged to the U.S. dollar, are the exceptions. In the Middle East, many countries (including Jordan, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) peg to the U.S. dollar for the stability—the oil-rich nations need the United States as a major trading partner for oil. In Asia, Macau and Hong Kong fix to the U.S. dollar. China, on the other hand, has been embroiled in controversy about its currency policy. While it does not officially peg its currency, the Chinese yuan, to a basket of currencies that include the US dollar, it does manage it through to benefit its manufacturing and export-driven economy.

Major Fixed Currencies

Below is a list of some of the national economies and the corresponding rates that currently peg to the U.S. dollar as of October 2018.

Country

Region

Currency Name

Code

Peg Rate

Rate Since

Bahrain

Middle East

Dollar

BHD

0.376

2001

Belize Central America Dollar BZ$ 2.00 1978

Cuba

Central America

Convertible Peso

CUC

1.000

2011

Djibouti

Africa

Franc

DJF

177.721

1973

Eritrea

Africa

Nakfa

ERN

10.000

2005

Hong Kong

Asia

Dollar

HKD

7.75-7.85

1998

Jordan

Middle East

Dinar

JOD

0.709

1995

Lebanon

Middle East

Pound

LBP

1507.5

1997

Oman

Middle East

Rial

OMR

0.3845

1986

Panama

Central America

Balboa

PAB

1.000

1904

Qatar

Middle East

Riyal

QAR

3.64

2001

Saudi Arabia

Middle East

Riyal

SAR

3.75

2003

United Arab Emirates

Middle East

Dirham

AED

3.6725

1997

Source: Investmentfrontier.com

The Bottom Line

It makes sense for many small nations to fix their currency to the US dollar, especially if the primary source of revenues comes in the form of the dollar. This pegged strategy helps stabilize and secure small economies which may otherwise be unable to withstand volatility. Conversely, large and growing economies will find it hard over time to maintain a fixed currency policy, which will eventually snowball into an outsized need to buy more and more dollars to maintain the proper ratio.

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