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Exchange Rate Regime

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  1. Pegged exchange rate is known as one the most important type of exchange rate regime in which the key consideration is that currency value should be fixed against the value of other currencies (the currency of other countries). While on the other hand, the floating exchange rate is a regime where a nation set out their currency prices by the forex market on the basis of supply and demand flow relatively to other currencies. SEK followed the regime of free floating while on the other hand DKK decided to pick up the pegged regime (Robinson, Henry, Pirie, Broihahn, & Cope, 2015).
  2. Fixed and floating exchange rates has several advantages and disadvantages for monetary policy, consumers, importers, and exporters.
  Advantages Disadvantages
Monetary Policy
·         Floating exchange rates allow the governments and central banks of a nation to have a great degree of independence.

·         While in case of fixed exchange rates, the Central banks of different nations have to act in tandem. This is because the monetary policy that they set could influence or be influenced by the economic conditions of member nations.
·         Freely floating currency rate implies a lot of volatility. Basically, currency value fluctuates or get changes on the basis of real time.

·         Fixed currency rate provide ease to the monetary policy in developing plans and regulating the money circulation in the country.
Importers and Exporters
·   The advantage of a fixed exchange rate is providing greater certainty for importers and exporters, therefore encouraging more international trade and investment.

·   While floating exchange rate create difficulties in currency valuation during international trade
·      Fixed exchange rate can prevent adjustments for several kinds of currencies that are overvalued and undervalued.

·      While floating exchange rate increase fear of risk factor for importers and exporters as they are chances that competitor can win market by offering better options.
Consumers Floating exchange rate can get adjustment in response to the increase in inflation. Fixed exchange rate causes to influence consumer when inflation rate increases or decreases.

 

  1. There are some countries that are pegging their currencies in the Euro. For instance Denmark that has currency of DKK. While on the other hand other countries such as Iceland and Norway, are linked with the EU. These countries has full independence in economic affairs and monetary circulation. Therefore, DKK and SEK fortunes are sharply diverging. Basically, both DKK and SEK are facing different circumstances. Somehow, SEK is relatively in stable and better position as compared to the position of DKK. High investment and Swedish interest rates were the key factors that support SEK to be stable. While later changes in the policy caused risk of disruptive decline as a result of this SEK was influenced negatively.(Wheatley, 2018)
  2. The FT article suggest the alternative currency trade supported by the Russian government. As a result of increase in this trade there is possibility that SEK will face problems. SEK is concerned with Euro but Russian bonds support their own currency and decrease in federal reverse of foreign currency (for instance, currency reverse of UK and US).
  3. The FT article explains that association between markets and SEK. Article explained that SEK is associated with the Korea. But the target of Russian Federation is to maximize their bond market therefore, it is possibility that increase in the Russian bond market influence the SEK(Wheatley, 2018). Somehow, it does not mean that main target is to influence SEK in fact, SEK is getting effect indirectly as Russia just want to promote their bond market to get financial advantages.

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