A standard argument for having a fixed exchange rate is that businessmen and market participants can make decisions knowing exactly how much the currency will be worth in the future.
Two countries with fixed rates -- Argentina and Hong Kong -- now show how that may not be true, that a good deal of the supposed benefits of a fixed exchange rate is overstated.
Both Argentina and Hong Kong run fixed exchange rates under the auspices of currency boards. Currency boards are known as "hard peg" foreign-exchange systems. The basic idea is for the government to peg its currency to a reserve currency by offering to buy or sell any amount of domestic currency at the pegged rate for the reserve currency.
To qualify as a real currency board, the government must promise to hold reserve currency at least equal to the amount of local currency in circulation. Some economists compare a currency board to a vending machine that changes reserve currency for local currency upon demand.
The decade of the 1990s witnessed the implosion of one fixed exchange-rate regime after another. Yet no currency board failed.
For that matter, none has ever failed. Currency boards are considered the only bulletproof fixed foreign-exchange system.
In fact, a currency board is only ironclad for as long as the government wishes to maintain it. True, the board works like a machine. But what if the person responsible for the machine turns it off? Even the smallest hint that the board may be discontinued can create a disaster. Though the peg might hold, the rush to sell the local currency both inside and outside the country will drive interest rates through the roof.
Nowhere is this seen better than in the forward market. The forward value of the currency drops relative to the spot value because of the demand to hedge assets denominated in the local currency.
So the peg may hold but the storm goes elsewhere -- namely into the interest-rate markets. This, I might add, can have profoundly negative implications for the stock market.
Take the case of Argentine Economy Minister Domingo Cavallo.
He cannot even leave Argentina without starting a run on the peso.
The guy is literally trapped, not just financially, but also geographically.
The latest example was his surprise trip to New York this week. Making it worse, Cavallo came to see officials of the Federal Reserve. Cavallo's people say the trip was aimed at bolstering the image of Argentina and of Cavallo's policies.
That's not how the market took it. Traders figured he was coming up north to tell the Fed he was throwing in the towel on the currency board or defaulting on Argentina's sovereign debt, or both. Not that either happened. Not yet, at least.
The point is that even with a hard peg, everyone has to walk on eggshells to avert a panic.
Nvidia Corp yesterday unveiled its new high-speed interconnect technology, NVLink Fusion, with Taiwanese application-specific IC (ASIC) designers Alchip Technologies Ltd (世芯) and MediaTek Inc (聯發科) among the first to adopt the technology to help build semi-custom artificial intelligence (AI) infrastructure for hyperscalers. Nvidia has opened its technology to outside users, as hyperscalers and cloud service providers are building their own cost-effective AI chips, or accelerators, used in AI servers by leveraging ASIC firms’ designing capabilities to reduce their dependence on Nvidia. Previously, NVLink technology was only available for Nvidia’s own AI platform. “NVLink Fusion opens Nvidia’s AI platform and rich ecosystem for
‘WORLD’S LOSS’: Taiwan’s exclusion robs the world of the benefits it could get from one of the foremost practitioners of disease prevention and public health, Minister Chiu said Taiwan should be allowed to join the World Health Assembly (WHA) as an irreplaceable contributor to global health and disease prevention efforts, Minister of Foreign Affairs Lin Chia-lung (林佳龍) said yesterday. He made the comment at a news conference in Taipei, hours before a Taiwanese delegation was to depart for Geneva, Switzerland, seeking to meet with foreign representatives for a bilateral meeting on the sidelines of the WHA, the WHO’s annual decisionmaking meeting, which would be held from Monday next week to May 27. As of yesterday, Taiwan had yet to receive an invitation. Taiwan has much to offer to the international community’s
CAUSE AND EFFECT: China’s policies prompted the US to increase its presence in the Indo-Pacific, and Beijing should consider if this outcome is in its best interests, Lai said China has been escalating its military and political pressure on Taiwan for many years, but should reflect on this strategy and think about what is really in its best interest, President William Lai (賴清德) said. Lai made the remark in a YouTube interview with Mindi World News that was broadcast on Saturday, ahead of the first anniversary of his presidential inauguration tomorrow. The US has clearly stated that China is its biggest challenge and threat, with US President Donald Trump and US Secretary of Defense Pete Hegseth repeatedly saying that the US should increase its forces in the Indo-Pacific region
ALL TOGETHER: Only by including Taiwan can the WHA fully exemplify its commitment to ‘One World for Health,’ the representative offices of eight nations in Taiwan said The representative offices in Taiwan of eight nations yesterday issued a joint statement reiterating their support for Taiwan’s meaningful engagement with the WHO and for Taipei’s participation as an observer at the World Health Assembly (WHA). The joint statement came as Taiwan has not received an invitation to this year’s WHA, which started yesterday and runs until Tuesday next week. This year’s meeting of the decisionmaking body of the WHO in Geneva, Switzerland, would be the ninth consecutive year Taiwan has been excluded. The eight offices, which reaffirmed their support for Taiwan, are the British Office Taipei, the Australian Office Taipei, the
RSS