Basket Of currencies:
It’s a selective group of currencies ( Dollar, Yen, …) in which the average is used as a measure of the value, and its commonly used to avoid the risk of any currency fluctuating. An Example of pegging to a basket of currencies is Kuwait:
In May of 2007 Kuwait dropped the peg to U.S dollar and pegged to a basket of currencies in the beginning Kuwait inflation rate rose from 0.69% in the second quarter of 2007 to 4.2% in the first quarter of 2008. Overall, the increase in prices during that period was more than 10%. Then in the second half of 2008 the rate of inflation started to decrease and in 2009 it decreased even more. Unbelievers say that pegging the currency to a basket of currencies is not good that the inflation will increase and may not fall but we can see that Kuwait’s inflation rate only increased at the beginning of the peg May 2007 tell half of 2008 and then it started to decrease. The rise of the inflation in Kuwait is not only because the pegged to the basket of currencies there is a lot of factors as the Kuwaiti economics says, some of the reasons for example: the increase of workers paycheck, increase in the prices of goods, increase in government spending, interest rate cuts causing financial liquidity and lower prices for the dollar compared to other currencies and peg to a basket of currencies instead of the dollar.
We all know that the U.S dollar is decreasing gradually and that effects on the Kuwaiti dinar so after they have dropped the peg to dollar and pegged to a basket of currencies the Kuwaiti dinar is now more stabile and started to restore his strength compared to other currencies and its provided flexibility in determining the exchange rate and contributed to strengthening the capacity of the local economy to absorb the impact of fluctuations in currency exchange rates. So we recommend the pegging to a basket of strong currencies. We will be still pegged to the U.S dollar but we will also be pegged to...
Please join StudyMode to read the full document