Thread: Very Interesting information on RV and PEG!!!!

Hi Everyone,

I am not sure if anyone has ever posted this information but I just found it and I found it very informative. I thought I would share this with all of you. If they peg I think they will peg high comparable to Kuwait and at a fixed exchange rate. Other wise if the peg at $1.48 I think it will be a floating rate which will climb quickly based on supply and demand. But there is a good possibility that they will go with a fixed rate as they already have the supply and demand. It will give security to investors entering the Country. I think if they go with this option we will be amazed at what it comes in at. That may explain why Saudi wants to revalue their money.

Dollarization Explained
August 25, 2004 | By Reem Heakal

Email this Article Print this Article Comments Alerts Add to del.icio.us
Other RSS Readers

Since the abandonment of the gold standard at the outbreak of WWI and the Bretton Woods Conference following WWII, some countries have been desperately seeking ways to promote global economic stability and hence their own prosperity. For the majority of these countries, the optimal way to obtain currency stability has been to peg the local currency to a major convertible currency. However, another option is to abandon the local currency in favor of the exclusive use of the U.S. dollar (or another major international currency, such as the euro). This is known as 'full dollarization'.

How Pegging Works

The extreme method of pegging lies in a currency board, by which countries "anchor" their local currencies to a convertible currency (usually the USD). (To learn more about this, see What Is A Currency Board? and Floating And Fixed Exchange Rates.) The result is that the local currency has the same value and stability as the foreign currency. Pegging has typically been a way to substantiate the value of a local currency against the world's convertible currencies and to stabilize the exchange rate.

The Dollarization Alternative

As an alternative to maintaining a floating currency or a peg, a country may decide to implement full dollarization. The main reason a country would do this is to reduce its country risk, thereby providing a stable and secure economic and investment climate. Countries seeking full dollarization tend to be developing or transitional economies, particularly those with high inflation.

Many of the economies opting for dollarization already informally use foreign tender in private and public transactions, contracts, and bank accounts; however, this use is not yet official policy, and the local currency is still considered the primary legal tender. By deciding to use the foreign tender, individuals and institutions are protecting against possible devaluation of the local exchange rate. Full dollarization, however, is an almost permanent resolution: the country's economic climate becomes more credible as the possibility of speculative attacks on the local currency and capital market virtually disappears.

The diminished risk encourages both local and foreign investors to invest money into the country and the capital market. And the fact that an exchange rate differential is no longer an issue helps reduce interest rates on foreign borrowing.

Disadvantages of Dollarization

There are some substantial drawbacks to adopting a foreign currency. When a country gives up the option to print its own money, it loses its ability to directly influence its economy, including its right to administer monetary policy and any form of exchange rate regime.

The central bank loses its ability to collect 'seigniorage', the profit gained from issuing coinage (the minting of monies costs less than the actual value of the coinage). Instead, the U.S. Federal Reserve collects the seigniorage, and the local government and gross domestic product (GDP) as a whole thus suffer a loss of income.

In a fully dollarized economy, the central bank also loses its role as the lender of last resort for its banking system. While it may still be able to provide short-term emergency funds from held reserves to banks in distress, it would not necessarily be able to provide enough funds to cover the withdrawals in the case of a run on deposits.

Another disadvantage for a country that opts for full dollarization is that its securities must be bought back in USD. If the country does not have a sufficient amount of reserves, it will either have to borrow the money by running a current account deficit or find a means to accumulate a current account surplus.

Finally, because a local currency is a symbol of a sovereign state, the use of foreign currency instead of the local one may damage a nation's sense of pride.

Advantages of Dollarization

Besides reducing risk and protecting against inflation and devaluation, there are some compelling reasons for a country to decide to give up so much control over its economy.

As we mentioned above, full dollarization creates positive investor sentiment, almost extinguishing speculative attacks on the local currency and the exchange rate. The result is a more stable capital market, the end of sudden capital outflows, and a balance of payments that is less prone to crises. (You can read more about the BOP in What Is The Balance Of Payments?)

Last but not least, full dollarization can improve the global economy by allowing for easier integration of economies into the world's market.

Conclusion

Many emerging economies already use dollarization to some extent or another. However, many have shied away from it because economies that would consider full dollarization are those that are still developing. For many countries, having an autonomous economic policy and the sense of individual statehood that comes with it is too much to give up for full dollarization, an extreme option that is for the most part irreversible.

Dollarization Explained

Dinar-Excited

Floating And Fixed Exchange Rates
February 6, 2003 | By Reem Heakal

Email this Article Print this Article Comments Alerts Add to del.icio.us
Other RSS Readers


Did you know that the foreign exchange market (also known as FX or forex) is the largest market in the world? In fact, over $1 trillion is traded in the currency markets on a daily basis. This article is certainly not a primer for currency trading, but it will help you understand exchange rates and why some fluctuate while others do not.

What Is an Exchange Rate?

An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is the value of another country's currency compared to that of your own. If you are traveling to another country, you need to "buy" the local currency. Just like the price of any asset, the exchange rate is the price at which you can buy that currency. If you are traveling to Egypt, for example, and the exchange rate for USD 1.00 is EGP 5.50, this means that for every U.S. dollar, you can buy five and a half Egyptian pounds. Theoretically, identical assets should sell at the same price in different countries, because the exchange rate must maintain the inherent value of one currency against the other.

Fixed

There are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen, or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged.

If, for example, it is determined that the value of a single unit of local currency is equal to USD 3.00, the central bank will have to ensure that it can supply the market with those dollars. In order to maintain the rate, the central bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the central bank which it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation/deflation), and ultimately, the exchange rate. The central bank can also adjust the official exchange rate when necessary.

Floating

Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting", as any differences in supply and demand will automatically be corrected in the market. Take a look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and thus stimulating demand for local goods and services. This in turn will generate more jobs, and hence an auto-correction would occur in the market. A floating exchange rate is constantly changing.

In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can also influence changes in the exchange rate. Sometimes, when a local currency does reflect its true value against its pegged currency, a "black market" which is more reflective of actual supply and demand may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market.

In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation; however, it is less often that the central bank of a floating regime will interfere.

The World Once Pegged

Between 1870 and 1914, there was a global fixed exchange rate. Currencies were linked to gold, meaning that the value of a local currency was fixed at a set exchange rate to gold ounces. This was known as the gold standard. This allowed for unrestricted capital mobility as well as global stability in currencies and trade; however, with the start of World War I, the gold standard was abandoned.

At the end of World War II, the conference at Bretton Woods, in an effort to generate global economic stability and increased volumes of global trade, established the basic rules and regulations governing international exchange. As such, an international monetary system, embodied in the International Monetary Fund (IMF), was established to promote foreign trade and to maintain the monetary stability of countries and therefore that of the global economy.

It was agreed that currencies would once again be fixed, or pegged, but this time to the U.S. dollar, which in turn was pegged to gold at USD 35/ounce. What this meant was that the value of a currency was directly linked with the value of the U.S. dollar. So if you needed to buy Japanese yen, the value of the yen would be expressed in U.S. dollars, whose value in turn was determined in the value of gold. If a country needed to readjust the value of its currency, it could approach the IMF to adjust the pegged value of its currency. The peg was maintained until 1971, when the U.S. dollar could no longer hold the value of the pegged rate of USD 35/ounce of gold.

From then on, major governments adopted a floating system, and all attempts to move back to a global peg were eventually abandoned in 1985. Since then, no major economies have gone back to a peg, and the use of gold as a peg has been completely abandoned.

Why Peg?

The reasons to peg a currency are linked to stability. Especially in today's developing nations, a country may decide to peg its currency to create a stable atmosphere for foreign investment. With a peg the investor will always know what his/her investment value is, and therefore will not have to worry about daily fluctuations. A pegged currency can also help to lower inflation rates and generate demand, which results from greater confidence in the stability of the currency.

Fixed regimes, however, can often lead to severe financial crises since a peg is difficult to maintain in the long run. This was seen in the Mexican (1995), Asian and Russian (1997) financial crises: an attempt to maintain a high value of the local currency to the peg resulted in the currencies eventually becoming overvalued. This meant that the governments could no longer meet the demands to convert the local currency into the foreign currency at the pegged rate. With speculation and panic, investors scrambled to get out their money and convert it into foreign currency before the local currency was devalued against the peg; foreign reserve supplies eventually became depleted. In Mexico's case, the government was forced to devalue the peso by 30%. In Thailand, the government eventually had to allow the currency to float, and by the end of 1997, the bhat had lost its value by 50% as the market's demand and supply readjusted the value of the local currency.

Countries with pegs are often associated with having unsophisticated capital markets and weak regulating institutions. The peg is therefore there to help create stability in such an environment. It takes a stronger system as well as a mature market to maintain a float. When a country is forced to devalue its currency, it is also required to proceed with some form of economic reform, like implementing greater transparency, in an effort to strengthen its financial institutions.

Some governments may choose to have a "floating," or "crawling" peg, whereby the government reassesses the value of the peg periodically and then changes the peg rate accordingly. Usually the change is devaluation, but one that is controlled so that market panic is avoided. This method is often used in the transition from a peg to a floating regime, and it allows the government to "save face" by not being forced to devalue in an uncontrollable crisis.

Although the peg has worked in creating global trade and monetary stability, it was used only at a time when all the major economies were a part of it. And while a floating regime is not without its flaws, it has proven to be a more efficient means of determining the long term value of a currency and creating equilibrium in the international market

Floating And Fixed Exchange Rates

Dinar-Excited

Originally Posted by Dinar-Excited

Hi Everyone,

I am not sure if anyone has ever posted this information but I just found it and I found it very informative. I thought I would share this with all of you. If they peg I think they will peg high comparable to Kuwait and at a fixed exchange rate. Other wise if the peg at $1.48 I think it will be a floating rate which will climb quickly based on supply and demand. But there is a good possibility that they will go with a fixed rate as they already have the supply and demand. It will give security to investors entering the Country. I think if they go with this option we will be amazed at what it comes in at. That may explain why Saudi wants to revalue their money.

Dollarization Explained
August 25, 2004 | By Reem Heakal

Email this Article Print this Article Comments Alerts Add to del.icio.us
Other RSS Readers

Since the abandonment of the gold standard at the outbreak of WWI and the Bretton Woods Conference following WWII, some countries have been desperately seeking ways to promote global economic stability and hence their own prosperity. For the majority of these countries, the optimal way to obtain currency stability has been to peg the local currency to a major convertible currency. However, another option is to abandon the local currency in favor of the exclusive use of the U.S. dollar (or another major international currency, such as the euro). This is known as 'full dollarization'.

How Pegging Works

The extreme method of pegging lies in a currency board, by which countries "anchor" their local currencies to a convertible currency (usually the USD). (To learn more about this, see What Is A Currency Board? and Floating And Fixed Exchange Rates.) The result is that the local currency has the same value and stability as the foreign currency. Pegging has typically been a way to substantiate the value of a local currency against the world's convertible currencies and to stabilize the exchange rate.

The Dollarization Alternative

As an alternative to maintaining a floating currency or a peg, a country may decide to implement full dollarization. The main reason a country would do this is to reduce its country risk, thereby providing a stable and secure economic and investment climate. Countries seeking full dollarization tend to be developing or transitional economies, particularly those with high inflation.

Many of the economies opting for dollarization already informally use foreign tender in private and public transactions, contracts, and bank accounts; however, this use is not yet official policy, and the local currency is still considered the primary legal tender. By deciding to use the foreign tender, individuals and institutions are protecting against possible devaluation of the local exchange rate. Full dollarization, however, is an almost permanent resolution: the country's economic climate becomes more credible as the possibility of speculative attacks on the local currency and capital market virtually disappears.

The diminished risk encourages both local and foreign investors to invest money into the country and the capital market. And the fact that an exchange rate differential is no longer an issue helps reduce interest rates on foreign borrowing.

Disadvantages of Dollarization

There are some substantial drawbacks to adopting a foreign currency. When a country gives up the option to print its own money, it loses its ability to directly influence its economy, including its right to administer monetary policy and any form of exchange rate regime.

The central bank loses its ability to collect 'seigniorage', the profit gained from issuing coinage (the minting of monies costs less than the actual value of the coinage). Instead, the U.S. Federal Reserve collects the seigniorage, and the local government and gross domestic product (GDP) as a whole thus suffer a loss of income.

In a fully dollarized economy, the central bank also loses its role as the lender of last resort for its banking system. While it may still be able to provide short-term emergency funds from held reserves to banks in distress, it would not necessarily be able to provide enough funds to cover the withdrawals in the case of a run on deposits.

Another disadvantage for a country that opts for full dollarization is that its securities must be bought back in USD. If the country does not have a sufficient amount of reserves, it will either have to borrow the money by running a current account deficit or find a means to accumulate a current account surplus.

Finally, because a local currency is a symbol of a sovereign state, the use of foreign currency instead of the local one may damage a nation's sense of pride.

Advantages of Dollarization

Besides reducing risk and protecting against inflation and devaluation, there are some compelling reasons for a country to decide to give up so much control over its economy.

As we mentioned above, full dollarization creates positive investor sentiment, almost extinguishing speculative attacks on the local currency and the exchange rate. The result is a more stable capital market, the end of sudden capital outflows, and a balance of payments that is less prone to crises. (You can read more about the BOP in What Is The Balance Of Payments?)

Last but not least, full dollarization can improve the global economy by allowing for easier integration of economies into the world's market.

Conclusion

Many emerging economies already use dollarization to some extent or another. However, many have shied away from it because economies that would consider full dollarization are those that are still developing. For many countries, having an autonomous economic policy and the sense of individual statehood that comes with it is too much to give up for full dollarization, an extreme option that is for the most part irreversible.

Dinar-Excited

Great info indeed.
However, there has been numerous articles where Saudi has said they are not going to reval their currency. They have said it is all a rumor. Who knows thought, it could be spin.

This is pulled from the iif. Take it for what it's worth. Just a rumor don't get crazy over it.
I posted this here although it is not a rumor.
My friend got a call today from his Dinar seller that he has someone in Kuwiat that works there that each paycheck he gets he goes into CBI and buys more Dinars, he just called and said they would not sell him any more Dinars??? I wonder why this is??? If I find out more I will post it here.

I just called him and he said that the teller told him that the next time he will be able to do anything there it will be on the Forex..
WOW.. I hope this is something!!!!!!!!!!!!!

also wenn ich das alles hier so lese, dann interessiert mich nur eine hübsche irakische frau. aber das hat ja wohl nichts mit euren spekulationen zu tun. sollte aber eine interesse haben, dann bitte melden... andi

Originally Posted by anki

also wenn ich das alles hier so lese, dann interessiert mich nur eine hübsche irakische frau. aber das hat ja wohl nichts mit euren spekulationen zu tun. sollte aber eine interesse haben, dann bitte melden... andi

I believe they have other web sites for you to find the women of your dreams!!!

Originally Posted by mrvgs

This is pulled from the iif. Take it for what it's worth. Just a rumor don't get crazy over it.
I posted this here although it is not a rumor.
My friend got a call today from his Dinar seller that he has someone in Kuwiat that works there that each paycheck he gets he goes into CBI and buys more Dinars, he just called and said they would not sell him any more Dinars??? I wonder why this is??? If I find out more I will post it here.

I just called him and he said that the teller told him that the next time he will be able to do anything there it will be on the Forex..
WOW.. I hope this is something!!!!!!!!!!!!!

WOOOOOOOOOOOOOOOOOOOTTTTTTTTTTTTTTTT

Originally Posted by mrvgs

This is pulled from the iif. Take it for what it's worth. Just a rumor don't get crazy over it.
I posted this here although it is not a rumor.
My friend got a call today from his Dinar seller that he has someone in Kuwiat that works there that each paycheck he gets he goes into CBI and buys more Dinars, he just called and said they would not sell him any more Dinars??? I wonder why this is??? If I find out more I will post it here.

I just called him and he said that the teller told him that the next time he will be able to do anything there it will be on the Forex..
WOW.. I hope this is something!!!!!!!!!!!!!

when you say Kuwait and "there" does that mean Kuwait or Iraq, cause you also say CBI. Which leads to my next question, is there a CBI in Kuwait? or did this person just get confused and meant a bank in Kuwait. Cause if they're trying to buy from the CBI in Kuwait no wonder they wouldn't sell. Just wondering

Originally Posted by mrvgs

This is pulled from the iif. Take it for what it's worth. Just a rumor don't get crazy over it.
I posted this here although it is not a rumor.
My friend got a call today from his Dinar seller that he has someone in Kuwiat that works there that each paycheck he gets he goes into CBI and buys more Dinars, he just called and said they would not sell him any more Dinars??? I wonder why this is??? If I find out more I will post it here.

I just called him and he said that the teller told him that the next time he will be able to do anything there it will be on the Forex..
WOW.. I hope this is something!!!!!!!!!!!!!

Thanks for that post. Even though it comes from there, this is the knid of post that would lend to the r/v. I have always thought that boots on the ground would hear or know something before this hits.

OSOK

As I undersatnd it the person works in Kuwiat and buys dinar every pay check from some type of exchange that sells dinar. Don't take the term CBI to mean what we know it to mean. Look I am just passing on info I found in a rumor section. I don't want to raise any false hopes. I personally feel all of these rumors are half of the fun until it happens. It's like having a lottery ticket that gets played everyday. One day the winning numbers(r/v) will come up and everybody will win. JMHO, Mrvgs.