Following the generalized floating of the world’s major currencies in 1973, a number of smaller countries began pegging the value of their currencies to an average value, or basket, of selected foreign currencies.
At the end of 1985, 43 member countries of the Fund maintained such basket peg arrangements. Taking into account countries that adopted and then abandoned a basket peg, the total number of countries with such arrangements during 1973-85 was 63
While the ability to maintain a market determined exchange rate is a benefit of free floating shared by all countries, it can be a relatively costly arrangement for small countries, with their smaller volume of foreign exchange transactions, relatively inelastic trade flows, and less developed financial markets.
These countries, therefore, have a greater incentive to choose a fixed over a freely floating exchange rate. In the current environment, however, when most major currencies are floating independently, no small country can maintain a strictly fixed exchange rate system: a decision to peg the currency to any major currency inevitably leads it to float against all other floating currencies.
The choice of a basket depends upon the exchange rate policy objective of the authorities. This objective may be defined in terms of a readily identifiable relative price variable, such as the terms of trade or the real exchange rate, or in terms of a macroeconomic variable such as the balance of trade or, more important, the balance of payments.
Once the objective is defined, the choice of currencies and the weights to be assigned to them in Finance & Development I September 1986 41 ©International Monetary Fund. Not for Redistribution the basket can be made on the basis of the relative importance the authorities attach to exchange rate stability against various currencies in the light of the chosen policy objective. The greater the need for stability vis-a-vis a particular currency, the greater its relative weight in the basket. Determining the exact weights is a complex exercise.
Bottom line is this – the IMF fully intends to repeg the IQD to a basket of currencies once they revalue it and turn it back on FOREX (as you know this is called a reinstatement for all you newbies). It will initially be a FREE FLOAT driven by market fluctuations however it will be monitored and my CBI contact has told me they will cap it at a level to control the initial massive swings, if needed.
Then over a period, the rate is expected to settle down to its nominal rate. I am told this could be about $3.85ish. The then CBI director in 2011 Dr. Shabibi told his audience in a news media conference on the Iraqi economy that the dinar could sustain a fluctuation as high as $16 USD. Many of these very stupid intel gurus have told you many lies about what he really said as they exaggerate this peak amount to much, much more. Don’t believe it.
I am told that the IMF will use the cap at about $9-$11 to prevent wild swings out of control that could potentially hurt the basket. I also want to bring out the very recent article on the Special Drawing Rights (SDR) and how important this article is, however, most readers did not even realize or catch on as to why they were explaining all of this to us. So, let me bring it to your attention again. Let me bring out the main points of this article since we are talking about this basket today and connect this SDR news to the basket of currencies we are about to see for the new peg.
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