What is the Need of the Linked Exchange Rate?

  • September 2014
  • Posted By Ninoslav

Have you any idea about the system of Linked exchange? Actually Linked Exchange Rate system is a connection or a link between one country’s currency and the other. It is an exchange rate system that is implemented for a good market. It is implemented by Hong Kong Market to fix or to stabilize a link between the rates of a Hong Kong Dollar and United Sates Dollar.

Why it is important?
It is important as when a rate is getting set between Hong Kong and a US Dollar then no other rules of government or any corporate party can affect it. Hence, both countries can easily trade on this fixed rate. The ratio of both currencies is fixed. Thus, if due to any case the exchange rate shifts from this ratio or fixed ratio then it becomes necessary to bring back that ratio and for that currency is either taken out or added to the circulation for an exact condition.

One more important thing is, if rate of a currency change, then the rate of the corresponding currency also changes to match this fixed ratio. The base of Monetary should be fully matched with foreign reserve for which it gets fixed.

If trader thinks that it is somehow alike as other pegging, then it is not true. It is totally different from the system of pegging between two different currencies. The confirmation gets fulfilled when local banking institutions held this particular linked currency. This keeps the low inflammation and also stabilizes the rate.

Hence, you can easily get how it is beneficial as Linked Exchange Rate has its own criteria. You will also get that it is different from other exchange system and thus you can easily know “How Floating Exchange Rate affects the economic condition?”


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