Forex What is a Fixed Exchange Rate? Pros and Cons

[FXOchartist]

Forex trading is trading foreign currency with other foreign currencies. Getting to know the fixed exchange rate for investors may be useful for investment decisions in countries that adopt this system.

Fixed exchange rate means a currency exchange rate determined by the government of a country and held firmly, usually pegged to the value of another country's currency or a group of foreign currencies.

Reffers to the FXOpen blog. here is the advantages and disadvantages of the fixed exchange rate.

Pros

• Stability in Global Trade. Fixed exchange rates reduce the risks associated with floating currency rates, making business planning easier.
• Reduced Risk in International Investments. Investors who invest in countries with a fixed exchange rate minimize the risk of losing money due to currency fluctuations.
• Control of Inflation Rates. A stable currency makes it easier to control inflation.
• Prevent Competitive Devaluations.
• Increased Policy Discipline
• Simplified Transactions

Cons:

• Overvaluation or Undervaluation, may not be in accordance with economic conditions at under-valuation or overvaluation values.
• High Costs of Maintenance. It requires large reserves to maintain the peg value
• Lack of Monetary Policy Flexibility, the country only focuses on the value of the pegged currency.
• Vulnerability to External Shocks. Economic shocks are easier to hit the pegged rate than the floating exchange rate.
• Risk of Speculative Attacks. Allows investors to attack when the value is overvalued or undervalued which might cause a crisis
• Reduced Responsiveness to Domestic Conditions. Limiting responses to economic conditions such as domestic economic changes, such as inflation, unemployment, or economic downturns.

Examples currencies with a fixed exchange rate system such as

• Hong Kong dollar (HKD) - pegged to the US dollar.
• United Arab Emirates dirham (AED) - pegged to the US dollar.
• West African CFA franc (XOF) and Central African CFA franc (XAF) - both pegged to the euro.
• Bahamian dollar (BSD) - pegged to the US dollar.
• Danish krone - pegged to the euro.

By understanding the advantages of fixed exchange rates, it may be useful to try to apply it to modern trading for long-term investment stability. We can find currency pairs on trading platforms such as MT4, MT5 or the FXOpen Ticktrader platform.