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What is the Need of Linked Exchange Rate?

  • September 2014
  • Posted By Ninoslav
  • 0 Comments

Have you heard about Linked Exchange Rate? What is this? It is a type of exchange rate regime in which currencies need to be linked with others. It means trade between two nation’s currencies takes place by linking them and set by exchange market. A link between the Hong Kong Dollar and US Dollar is stabilized in the Hong Kong Market. The exchange rate between Macao Pataca is similar to Hong Kong Dollar.

How it is implemented?
A Linked Exchange Rate manages the currency of a nation. It links nation’s currency to a particular base currency, which is having a fixed ratio and can easily be deposited in domestic banks. The ratio of both currencies has a balance. If the rate of exchange shifts from any particular fixed ratio then some currencies are either taken out or added to back the ratio balance.

How it is beneficial?
The most important feature is it controls the inflation as it stabilizes the rate of currency. The rate stabilizes currency by converting Hong Kong Dollar to US dollar or US Dollar to Hong Kong Dollar according to the condition for a good profit. This process continues. It is also very good for all traders that government does not interfere when the rate is determined by exchange market. It is implemented to get a good market which is beneficial for your country. The domestic bank also trades for a potential stability.

You should know that Linked Exchange Rate is completely different from fixed exchange rates. The inflation takes place much more when value of US dollar gets influenced due to any disaster. You should also know about “How Floating Exchange Rate influences the exchange market?

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