Exchange rate regimes in Asia, Europe, and the Americas

¶ … International Currency Structures and Foreign Exchange Trading

An exchange rate regime can be delineated as the system that a nation\'s central bank espouses to set up the exchange rate of its own currency against other currency. There are two main types of foreign exchange rate regimes. On one hand, the floating exchange rate system is where the value of a nation\'s currency changes are done based on the market forces of demand and supply. On the other hand, the fixed exchange rate is where the government intercedes and undertakes manipulation of the value of a nation\'s currency. For instance, China pegs its currency to the U.S. dollar. This hinders the market values from setting the value at a fixed amount (ACDC Leadership, 2014). The purpose of this paper is to discuss the different foreign exchange trading within the three continents of Asia, Europe and the Americas, in light of evaluating the flexible and fixed exchange rate system within this international context.

Asia

The People\'s Republic of China has become the dominating nation in Asia. This is with respect to the fact that it has become the largest trading nation in the world and the second largest economic power globally. In recent years, owing to the significant influence of trading, nations in East Asia have been following the movements of Renminbi more closely compared to the U.S. Dollar. In 2005, China declared a switch to a new exchange rate regime. In particular, the exchange rate would be set with regard to a basket of other currencies, permitting a fluctuation of up to positive or minus 3% within any certain day. This announcement was meant to be a way of increasing flexibility of the Renminbi exchange rate (Frankel and Wei, 2007). China used to peg the Renminbi very tightly to the U.S. dollar. However, in the past decade, the nation has contrived currency appreciation against the dollar by permitting a specific magnitude of exchange rate flexibility. China shifted its exchange rate system from a conventional U.S. dollar pin to an edging peg regime during July 2005. Even though it provisionally reinstated a traditional U.S. dollar peg system amid 2008 as well as 2010, it has yet again moved to an edging peg (Kawai and Pontines, 2014).

It has been claimed that China has been undervaluing the Renminbi in order to increase its level of exports. Through the manipulation of its currency value, China is able to aid its producers to retail their goods across the globe. Similarly, the nation impedes its rivals, for instance, the United States producers who manufacture and retail goods in the domestic market (Arnold, 2011; Huang & Lynch, 2013). China continued to run a trade surplus and foreign investment continued to flow into China. China intervened in the foreign exchange market, buying dollars and selling Yuan, to prevent the Yuan from appreciating. China continued to add dollars to its holdings of official international reserve assets. These government holdings of foreign currency dominated financial investments. Similar assets were worth $166 billion at the beginning of 2001, grew to $711 billion in mid-2005, and reached $2.45 trillion by mid-2010. As the world recovered from the worst of the global crisis, the United States and other countries resumed pressure on China to increase the exchange rate value of the Yuan. Although there was a wide range of estimates, a number of credible analysts concluded that the Yuan was still undervalued by perhaps 15 to 30%. On June 18, 2010, the Chinese government resumed allowing a slow increase in the exchange rate value of the Yuan, and by August 2014, it rose in value by another 11% (Pugel, 2016; Huang & lynch, 2013). Owing to this, China has the biggest reserve of U.S. dollars in comparison to any other nation, apart from the United States. In particular, it is estimated that its level of reserves surpassed the $3 trillion mark a few years back. By all means, the balance of trade has been in favor of China (Arnold, 2011).

Europe

Subsequent to the culmination of the Second World War, European nations employed the Bretton Woods system of fixed exchange rate. Under this exchange rate regime, the major currencies were all pegged to the U.S. dollar, which in turn was freely convertible to gold at a fixed price of $35 for every ounce. However, this system proved unreliable and soon collapsed. In 1979, the Exchange Rate Mechanism (ERM I) was born. This exchange rate system allowed exchange rate amongst nations within the European zone to trade within a narrow 2.25% above and below the dominant uniform currency values. This system prevailed up until the year 1999 when the Euro was introduced as the main unit of currency in the European area (Vij, 2010).

With this came the Exchange Rate Mechanism II (ERM II). The Exchange Rate Mechanism (ERM II) was established as a replacement to ERM to make certain that exchange rate variations amid the euro as well as other EU currencies don\'t interrupt economic strength inside a solo market; as well as to assist non-euro-area nations in preparing themselves for involvement within the euro region (European Union Commission, 2014). In instances of exchange rate pressures, the national central bank in cooperation with the European Central Bank (ECB) gets involved to maintain the exchange rate within the fluctuation band. Nations are expected to fulfill the Maastricht criteria by taking part in ERM II and maintaining a stable exchange rate. In essence, to satisfy the exchange rate convergence criteria, the nation\'s currency must be part of ERM II and at the same time stay within a range that is tighter than the standard plus or minus 15% fluctuation rate (Bukowski, 2006). In the contemporary, only the Danish Krone continues to operate in ERM II. Three EU member states have not espoused the euro as their main currency unit. On one hand, while the United Kingdom and Sweden have inflation-targeting regimes and a floating exchange rate with reference to the euro, Denmark follows a fixed-exchange-rate policy with reference to the euro. The transitional target for Danish monetary policy is therefore the krone/euro exchange rate (Thomsen, 2003). The UK has since then left the European Union.

The Americas

The Americas takes into account a massive range of nations, varying from major industrialized countries like the United States, Canada and Brazil, to tiny island nations situated in the Caribbean. In addition, the assortment of exchange rate systems espoused in the course of the 20th century is relatively remarkable. The prevailing distribution of exchange rate systems in the Americas expanse is considerably extensive. It varies from the long-lasting full dollarization employed in Puerto Rico and Panama, to Foreign Bank Account Reports (FBARs) and crawling pegs implemented in Nicaragua, Peru and Bolivia, to the floating exchange rate regime with infrequent intervention of Canada and Chile, and the free-floating exchange rate system of the United States, which is the biggest nation in the region (Corbo, 2002).

The following table delineates the foreign exchange rate systems implemented in the Americas in detail (Reinhart and Rogoff, 2002).

Hard Pegs

Intermediate Regimes

Floaters

Dollarization

Currency Union

Currency Board

Peg and crawling peg

De facto peg and crawling peg

Band

De facto band

Ecuador

East Caribbean Central Bank countries

Argentina

Nicaragua

Bolivia

Venezuela

Costa Rica

Brazil

El Savador

Suriname

Guatemala

Dominican Republic

Canada

Panama

Honduras

Paraguay

Chile

Puerto Rico

Jamaica

Uruguay

Colombia

Peru

Haiti

Mexico

United States

Conclusion

In general, there are fixed and floating exchange rate regimes. China is the dominant nation in the Asian region. In particular China employs the fixed exchange rate system by pegging the Renminbi against the U.S. Dollar. In recent years, it has been argued that the nation has been undervaluing its currency in order to improve its level of exportation. On the other hand, the European Union employs the Exchange Rate Mechanism (ERM II), with the Euro being the main currency unit of exchange. Only the Danish Krone remains in operation with the ERM II. In the Americas, there is a major variance of exchange rate system implemented ranging from full dollarization, FBARs, crawling pegs, floating exchange rate regime and the United States\' free floating exchange rate system (Corbo, 2002).