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Fixed Exchange Rate

Updated on March 9, 2023

Fixed exchange rate means tying the value of a country’s currency to another commodity or currency’s value. A fixed exchange rate regime helps the country in creating a stable environment for international trade. A fixed exchange rate means that people or businesses can exchange their money in one currency for the predefined amount of another currency. The US dollar is a widely used currency in international trade and most fixed exchange rates are aligned with the US dollar. Countries can fix their currencies to that of their most favoured trading partners.

Advantages of Fixed Exchange Rate

Some advantages of Fixed Exchange Rate are:
1. It helps in stabilizing the currency value in foreign markets and reduces risk.
2. Fixed Exchange Rate helps to prevent sudden depreciation of the currency.
3.Fixed Exchange Rate encourages more foreign investments in the country due to a stable exchange rate.

Dis-advantages of Fixed Exchange Rate

Dis-advantages of Fixed Exchange Rate are:
1. Fixed Exchange Rate makes use of monetary and fiscal policy for managing internal interest rates difficult.
2. Fixed Exchange Rate prevents market adjustments when a currency becomes over or undervalued.