Iraqi Dinar Discussion Board

[Aerospace]

Exchange rate and reserves.
http://www.investopedia.com/articles/03/020603.asp
If, for example, it is determined that the value of a single unit of local currency is equal to USD 3.00, (LOL...funny they would use that amount as an example)the central bank will have to ensure that it can supply the market with those dollars. In order to maintain the rate, the central bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the central bank which it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation/deflation), and ultimately, the exchange rate. The central bank can also adjust the official exchange rate when necessary.

Fixed regimes, however, can often lead to severe financial crises since a peg is difficult to maintain in the long run. This was seen in the Mexican (1995), Asian and Russian (1997) financial crises: an attempt to maintain a high value of the local currency to the peg resulted in the currencies eventually becoming overvalued. This meant that the governments could no longer meet the demands to convert the local currency into the foreign currency at the pegged rate. With speculation and panic, investors scrambled to get out their money and convert it into foreign currency before the local currency was devalued against the peg; foreign reserve supplies eventually became depleted. In Mexico's case, the government was forced to devalue the peso by 30%. In Thailand, the government eventually had to allow the currency to float, and by the end of 1997, the bhat had lost its value by 50% as the market's demand and supply readjusted the value of the local currency.




http://www.radioproject.org/transcript/1999/9920.html
The market is so huge that if speculators attack a particular currency the central bank of that particular country can't defend against the attack. They defend by throwing money into the market and buying up their own currency. The central bank reserves of small countries might only have a billion or two billion in their central bank reserves. If the size of the attack of the speculators is larger than that, the currency of that country call fall, can be devalued, and then what will happen is speculators will pull out rapidly and so will investors, so will factories. And then we'll see what we saw in Asia last year and in Brazil in January. So, for instance, Brazil threw several billion and the figure is not exactly clear from the newspaper articles I've read certainly, but it may have been upwards of twenty or thirty billion dollars that were thrown in to defending their currency before they decided to stop defending it. Now that's money that they may have had in their reserves for that purpose, but it is essentially money that is tax payer money that cannot be spent on anything else. So what often happens is it creates a condition of austerity in a country. There is less money for social programs. There's less money for education etc.