Currency basket

A currency basket is a weighted combination of various currencies into a single unit. The participating countries shall, for the basket currency (i ) the currency components ( Wi), the amounts of individual currencies, determine which should together make up one unit of the currency basket. The weights (Gi) of each currency in the basket are the exchange rates of various currencies (Ki ) against a common currency calculated (Gi = W i / K i).

The currency components are generally chosen so that the weights reflect the economic importance of the countries involved in about.

Meaning and application examples

Importance

The basket of currencies thus constitutes an artificial currency that is used both in the context of monetary policy as well as the protection of the company against exchange rate fluctuations. Such a currency basket can also be used to measure the price competitiveness of exports of a country. An example of such an artificial currency is the European Currency Unit. We accept a new local currency CB. U.S. Dollar, German Mark and Japanese Yen are involved in the currency basket of the country C as the currency components. The three currencies have the same weight. It follows that the real exchange rate of country C arises from the exchange rates of foreign currencies involved.

REi, CB = ( REi, U.S.) ( 1/3 ) * ( REi, JP ) (1/ 3) * ( REi, DM ) (1/ 3)

Examples Europe

Components

European Currency Unit (ECU)

Before the introduction of the euro was already a European currency unit, the European Currency Unit ( ECU). The ECU was defined as ( artificial) currency basket, which was composed of fixed proportions of twelve of the fifteen EU currencies. The official ECU acted, inter alia, as a unit of the European Monetary System (EMS ), as a means of payment between the national central banks as well as an official reserve currency. On 1 January 1999, the ECU was replaced by the euro in a 1:1 ratio.

European Monetary System (EMS)

The monetary system of the European Community sets of fixed exchange rates fixed (except Greece and the UK ) between the currencies of the Member States. The system is based on an exchange rate mechanism of the deviations of exchange rates from the bilateral central rate by / - 2.5 % ( Lira: - 6 % / ) allows and obliges the central banks in underlimit to intervention. The interventions carried out with the help of a credit system based on the ECU by a specially prescribed system. Likewise, there is a set of rules for a comprehensive financial aid system.

The European Currency Unit

The European Currency Unit as European accounting and monetary unit is an artificial basket currency, which was calculated from unanimous in specified proportions of the currencies of members of the European Monetary System (EMS) in the currency basket. The ECU was a central component of the EMS. For each currency, an exchange relation to the ECU has been set. From this central rates of the EMS currencies could be determined with each other. The exchange rates of various currencies were allowed to fluctuate around these central rates within certain ranges. Otherwise, the national central banks had to intervene to stabilize these fixed exchange rates. The ECU was abolished with the introduction of the euro.

The formation of a basket of currencies takes place at the International Monetary Fund ( IMF) fixing the value of a unit of Special Drawing Rights and the EWS to calculate the ECU. Here is defined on the one hand, what percentage a country's currency to one unit of the new " artificial currency " has (for example, 33 % of an ECU consist of DM, 13% pounds, etc.) and on the other is fixed, what absolute amount in the local currency this percentage represents (eg 33% of DM 's share of the ECU = DM 0.80, 13 % share of the ECU pound = 0.08 pounds, etc.). The new artificial currency used to determine the parity between the currencies of the member countries of the Fund to obtain a central parity and stabilize exchange rates. It applies, for example, 2.40 DM - 1 ECU = 0.61 Ł. The same principle is applied in the form of Special Drawing Rights in the IMF.

The special case of China

Yuan or Renminbi ( RMB) is the Chinese national currency. It is pegged to the U.S. dollar. The yuan refers to the U.S. dollar nominal exchange rate, which has not changed since 1994 for many years. The yuan is taking on foreign exchange rate fluctuations of the U.S. dollar against other currencies, where he maintains a very close relation to the U.S. dollar. The anchoring of the yuan to the dollar is justifiable, even if China never officially confirmed this.

On 21 July 2005, the Chinese government announced a surprise that this currency relationship should be replaced by binding to a basket of currencies. In addition, the yuan has appreciated against the dollar by 2.1 percent ( $ 1 = 8.11 RMB). Nearly three weeks after the end of the fixed dollar peg, the Chinese government has for the first time details about the composition of the new currency basket preisgegeben.Demnach is the national currency yuan primarily linked to the dollar, the euro, the Japanese yen and the South Korean won. " The currencies in the basket depend on the volume of our foreign trade from ," said the Chinese central bank governor Zhou Xiaochuan. " The U.S., Euro - zone, Japan and South Korea are now our largest trading partner, so their currencies are naturally the most important ones in the basket. " In addition, the Singapore dollar, the British pound, the Malaysian ringgit, the Russian ruble, the Australian dollar, the Thai baht and Canadian dollar are reported to contain. The weighting in the basket of currencies was based on data on foreign trade, foreign debt and foreign direct investment in China as well as foreign investment in the People's Republic. In addition, he oriented primarily of raw materials and services. According to the U.S. dollar in the Chinese currency basket should, 30 percent have the greatest weight, followed by the euro and the yen with 20 percent and the South Korean won with 10 percent.

Decisive is the composition of the currency basket for the currency reserves of the country. Because this would set up the Chinese so that the currency risk is minimized.

Currency baskets as an instrument of monetary policy

Under a fixed exchange rate peg currency baskets make especially for internationally intertwined economies an alternative to the exchange rate peg to a single currency dar. Here, the share of the currencies included in the basket depends on their importance for binding to the country. The exchange rates of the domestic currency against the currencies included in the basket flow proportionally in the exchange rate of the domestic currency against the currency basket. Objective of monetary policy is to keep the rate between the local currency and the currency basket constant. This is achieved in practice, for example through foreign exchange intervention.

The most popular currency basket was the ecu used until the introduction of the euro. It links to the member countries of the European Monetary System EMS tied. Another, introduced over a basket of currencies artificial currency, the Special Drawing Rights of the IMF.

Currently in China, the introduction of a currency basket in planning. In July 2005, the Chinese central bank announced the transition from a dollar peg to a currency basket bond of the Chinese currency yuan. The exact composition of the basket is not disclosed. Singapore pursued a similar policy here.

Currency baskets as a business tool

Increasingly, companies may make sense settlement in existing or fictitious currency baskets, as the less exchange rate fluctuations. In some industries ( eg telecommunications and postal services ) is an international billing in IMF Special Drawing Rights usual. Thus, for example, an exchange rate fluctuations between the euro and the U.S. dollar breaks through strongly because both currencies included in the calculation of the SDR.