A currency basket is a portfolio of selected currencies with different weightings. A currency basket is commonly used by investors to minimize the risk of currency fluctuations and also governments when setting the market value of a country’s currency.
An example of a currency basket is the European Currency Unit that was used by the European Community member states as the unit of account before being replaced by the euro. Another example is the special drawing rights of the International Monetary Fund.
A well-known measure is the U.S. dollar index, which is used by Forex traders. There are six currencies forming the index: five major currencies – Euro, Japanese yen, British pound, Canadian dollar, and Swiss franc – and the Swedish krona.
After major world currencies began to float in 1973, small countries in reaction decided to peg their currencies to one of the major currencies (e.g. U.S. Dollar, Pound Sterling). This led to a greater fluctuation against other major currencies and soon, some of the countries elected to manage the currency movements using more currencies, important for the given country, i.e. started to use currency baskets.
In following years, greater diversification in international trade led to greater use of the currency baskets and by 1985, according to IMF data, 63 countries had tried the currency basket policy and 43 of them were using it at the time.
In the following decades, the number of countries that anchored their exchange rate to a currency composite declined and in 2019, there were only eight of them. Three tracked the special drawing rights (SDR) as the sole currency basket or as a component of a broader reference basket (Botswana, Libya, Syria). Morocco tracked the euro and the U.S. dollar basket, and the remaining four countries did not disclose the composition of their reference currency baskets (Fiji, Kuwait, Singapore, Vietnam).
Baskets of currencies are ideal for small countries with less diversified production, which are well integrated with the global economy and thus more vulnerable to external disturbances.
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A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another measure of value, such as gold. There are benefits and risks to using a fixed exchange rate system. A fixed exchange rate is typically used to stabilize the exchange rate of a currency by directly fixing its value in a predetermined ratio to a different, more stable, or more internationally prevalent currency (or currencies) to which the currency is pegged.
An exchange rate regime is a way a monetary authority of a country or currency union manages the currency about other currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many of the same factors, such as economic scale and openness, inflation rate, the elasticity of the labor market, financial market development, and capital mobility. There are two major regime types: Floating (or flexible) exchange rate regime exist where exchange rates are determined solely by market forces and often manipulated by open-market operations.
The króna ˈkhrouːna or krona (sometimes called Icelandic crown; sign: kr; code: ISK) is the currency of Iceland. Iceland is the second-smallest country by population, after the Seychelles, to have its own currency and monetary policy. Like the Nordic currencies (such as the Danish krone, Swedish krona and Norwegian krone) that participated in the historical Scandinavian Monetary Union, the name króna (meaning crown) comes from the Latin word corona ("crown").
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