Adjustable Peg

Categories: Forex, Investing, Trading, Econ

While not an adjustable prosthetic leg, it functions similarly. An adjustable peg is a currency exchange rate policy in which a central bank keeps the nation's currency pegged, or fixed, to another currency. Nations that do this peg to either the USD or the Euro. The UAE pegs its currency to the USD at a rate of 3.67 AED (the dirham) to each USD. If the USD appreciates against another currency, so will the AED, and vice versa.

What happens if market conditions whack out the AED and it starts to fall out of its peg? The central bank will intervene and buy and sell foreign currencies until all is well again.

Countries will peg their currencies when they are seeking economic stability. Still others, like China, will peg their currency below another currency to gain an advantage in selling their exports. The US has accused the Chinese of keeping their currency artificially low as compared to the USD so that we consumer-driven Americans will buy up all those cheap Chinese goods. The Chinese are happy because their GDP increases at the expense of Americans, and they have a current account surplus, so they can buy up all the US apartment complexes and office buildings as investments. But this makes the US angry, since it takes jobs away, lowers the US GDP, and the current account deficit continues. Maybe the life of a peg-legged pirate is easier to understand.

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Finance a la shmoop what is an ex change rate? alright I give you two cleary's for

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one cat eye you give me to come quat's for one banana with the peel on this [Person trades come quats for banana]

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time thank you I give you forty two thousand three

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hundred eighty two dollars for this new Ford Hemi truck with the awooga horn yep

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these are all exchange rates marbles for marbles fruit for fruit and well dollars

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for trucks with awooga horns in place just do what you know... people off well in

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more common financee parlance exchange rates focus on the trading back and

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forth of national currencies while each country or region generally has its own [Selection of currencies appear and man holding an Uzi]

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currency printing more of that currency lets the government pay its bills more

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easily if it's not collecting enough dough in taxes but if it prints too much

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of that currency well then it falls in value relative to the currencies of

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other countries think about that you print lots of dollars and you have lots

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of debt well then it's easy to pay back your debt right but if you do that too [Money transfers into debt]

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long people don't trust your currency and then it creates all kinds of havoc

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when you want to trade with them well when all that happens and it's volatile

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currencies back and forth the goods of the inflated country seem cheap to other

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countries and in theory well then they buy more stuff from the country that's [Other countries trading from inflated country]

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got cheap currency and it makes it much more expensive for the inflated currency

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country to then buy more from the we don't print too much currency country

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one euro cost about two US dollars when it first came out in the early 90s a

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nice hotel that was 250 a night in Paris cost a US currency holder about 500

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bucks right like it was 250 euros it was 500 US dollars pay for that same hotel

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so you can imagine there were not a whole lot of US tourists anxious to rent

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Hotel nights from Rue de la blah blah blah but when Europeans looked at buying [eBay website appears]

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american-made speedo swimsuits oh yeah they were cheap and clearly too many

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Europeans bought them but then the euro fell into closer parity with the US

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dollar in part because faith in their economic union fell and because the US

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appeared to be printing money at a slower pace than worthy Europeans and

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the public kind of wanted US dollars instead of euros because they thought

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the US a little bit more secure so what happened well the relative

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inflation of the US was in better shape than that of Europe

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so today the exchange rate after a long time decades is now about one to one [Man discussing exchange rates]

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meaning one US dollar buys you about one euro and same vice versa yeah so

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you'd say that the rate of euros to dollars is about even and coincidentally

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a US dollar buys you about 100 new Japanese yen and a US dollar buys about

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600,000 Zimbabwean dollars and let's see US dollar also buys fourteen thousand

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galleons if you know you're vacationing at Hogwarts lovely time [Hogwarts castle appears]

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