Monday, May 21, 2007

Kuwait Abandons Dollar Peg

Kuwait abandons its dollar peg.Pegging currencies to other paper currencies is in most cases the worst alternative. Monetary unions are the ideal system if based on gold or if it does not mean a more inflationary policy than fluctuating exchange rates. Fluctuating exchange rates aren't good, but they are almost always a lesser evil compared to currency pegs. While currency pegs in some aspects are similar to currency unions, they have one vital flaw: they require massive intervention if the exchange rate is deemed either highly overvalued or highly undervalued. If overvalued, they create the need for capital flow controls or absurdly high interest rates, as we saw with the U.K. pound and Swedish krona in 1992. If undervalued, they created the need for massive accumulation of foreign exchange reserves, as we see now with China and some other Asian and oil-exporting countries. These interventions, who are unneeded both in currency unions and floating exchange rates, will create distortions that far outweigh any benefits from currency stability.

Kuwait will not float its currency, but shift to a currency basket of undisclosed composition. But given likely dollar weakness, it will nevertheless imply some appreciation.


Blogger David Wozney said...

A “Federal Reserve Note” is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold.

5:34 PM  

Post a Comment

<< Home