Does fixed exchange rates offer greatest protection against currency speculation? ... No matter when these occur, currency exchange generally becomes one of the salient issues (Brown, 1994, p. ... In respect of multinational and international business enterprises, the implications of exchange rate movements, thus, are inevitable. Amongst such potential effects facing most corporations, currency speculation has appeared to be of great concern. During the past few decades, the economy of many countries was under the attack of currency speculation, for example, 1995 Mexican Peso crisis and 1997 South-East Asian crisis. What is worth being noted is that those countries, prior to currency crises, opted for exchange rate fixity. A central question having been raised is whether fixed exchange rate can still work well for the preclusion of such a speculation.
This essay argues that fixed exchange rate does not give the greatest protection against currency speculation. The first part of the essay gives readers the general ideas of exchange rates including individual characteristics. The second examines how currency speculation materialises along with its adverse consequences. The essay then discusses a number of grounds on which astute traders will be able to speculate the currency movement in a particular country, despite the country having fixed exchange rate.
Generalisations about foreign Exchange rate
To do international transactions, currency conversion is a must, since each country or a group of countries has its own currency. Exchange rate can, in principle, be divided into two categories, namely fixed or pegged rate and flexible or floating rate. The former rate involves the reality that the central banks hold the currency value stagnant against certain foreign currencies. In other words, fixed currency cannot be changed over a given period of time. To intervene on the foreign exchange markets when the rate structure is being dislocated by market forces, governments need adequate reserves to meet the cash available to speculators (Douch, 1989, p. ... In terms of flexible rate, it is for the central banks to allow market mechanism to determine currency exchange rates, meaning that demand and supply will pinpoint exchange rate equilibrium between two countries (Brown, 1978, p. ... In respect of the generally believed advantages of both rates, fixed exchange rate is mainly believed to largely cope with currency uncertainty and control inflation, whereas floating system is to maintain balance of payments equilibrium and monetary autonomy (Pilbeam, 1998, pp.
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