Comparing Foreign Exchange Rate Policies, 2001-2013

| Monday, October 27th, 2014

Factors That Influence Exchange Rates

A large number of factors can influence the volume and direction of international money transfers. Among these, countries’ exchange rate policies play a critical role by helping to determine the value and stability of national currencies. The International Monetary Fund (IMF) published data in mid-2014 that compare foreign exchange rate policies among 188 member countries, finding that in the last decade, most economies have followed a general trend toward exchange rate liberalisation. Strong economic growth in the first half of the decade - particularly in fast-developing regions in South America, Asia and Africa - and an uptick in international payments encouraged a number of countries to adopt policies that freed their exchange rates to be determined by market forces.

However, the number of countries with a floating or free-floating currency decreased by over 20% in the last five years, reflecting the impact of the global economic downturn and higher risks facing emerging economies. By 2013, the majority of countries have settled somewhere in the middle, with varying degrees of management and intervention that allow them to stabilise the exchange rate and protect the value of their currency.

Moving Toward the Middle: 2001-07

The IMF compares exchange rate data through its Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER). Prior to 2001, the IMF notes that countries leaned toward opposite ends of the forex spectrum, opting either to float their currencies freely or to institute hard pegs. However, between 2001-07, many countries shifted to a middle ground with policies that allow governments to influence monetary supply and prices in response to market developments. The number of countries employing a hard peg - who either have no separate legal tender or operate a currency board - increased slightly from 21 to 23 by 2007.

The largest jump was seen among countries employing soft pegs, under which a currency’s value is stabilised against an anchor currency or a group of currencies. Its value is allowed to fluctuate within a certain band, which can be quite narrow (+/-1%) or wide (up to +/-30%). This segment increased by 15% over the period to reach 82 countries by 2007. A number of countries moved from lighter arrangements (i.e. with a wider band) to conventional direct pegs (narrower band). By 2007, 70 countries employed conventional pegs, mainly to the USD or the euro.

Countries with floating arrangements still represented the majority - 83 in 2007 - but had dropped from a peak of 93 in 2001. Countries with freely-floating currencies fell from 50 to just 35 over this period, as most moved to managed floats or to pegs. The IMF report emphasises that many lower- and middle-income countries learned that, unlike high-income economies, floating their currencies exposed them to significant risk; moving to more managed policies allowed them to avoid rapid appreciation or depreciation caused by volatile ‘hot money’ foreign capital portfolio investment flows.

Impact of the Global Downturn: 2008-13

The onset of the global economic downturn in 2008 continued to push countries toward the middle of the exchange rate policy spectrum. In the last five years, lower demand for international trade, and therefore overseas payments, weakened many countries’ external position and tightened their control over foreign exchange.

As of mid-2013, 25 have hard pegs, including 13 with no separate legal tender and 12 with currency boards. Direct pegs expose the economy to any volatility in the anchor country, which can undermine demand for overseas money transfers. However, it is important to note that tightly-managed exchange rates can be beneficial in certain cases. For example, the Hong Kong dollar (HKD) - committed to the US dollar peg since 1983 - became a more attractive reserve currency as tension heated up between Russia and the Ukraine in 2014. Following a renewed wave of economic sanctions, Hong Kong saw a strong uptick in demand in July and August as several large Russian firms moved a portion of their cash reserves to the more predictable HKD.

The number of countries with soft pegs expanded by 23% to reach 101 in 2013, to become the majority. Countries with conventional pegs fell from 70 in 2007 to just 45, as many governments shifted to more flexible, market-driven policies. Economies that use crawling peg arrangements - which allow currencies to fluctuate within a defined band relative to another currency or trade-weighted basket - jumped from just two in 2008 to 15 in 2013. Indonesia, Egypt and Singapore are among those countries which have recently moved to this type of crawling arrangement. The pool of countries with free-floating currencies dropped further to 65 from 2008-2013. Today, this group is made up of the world’s strongest economies, primarily in Europe and North America, whose currencies make up the majority of international money transfers and whose economies are capable of riding out market downturns.


IMF, Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) 2013, IMF, Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) 2007, The Economist, “Hong Kong’s finances: Going with the flow,” 9 August 2014,

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