Insight Into Why And How's Of Dual Currency Exchange Rate

By Author: darrelabbott
Total Articles: 5
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Most of us whether interested in economics or not are aware that currency exchange rate is the rate at which currency of a country can be bought or sold. Fluctuation in the foreign currency rates is due to the changes in the country's economic policies and varies on the basis of interest rates, inflation, public debt, foreign investment and several other factors.

Most of you would be under the impression that the foreign exchange rate for the country is common all over. However this is just half side of the picture of how foreign exchange rates are determined. Not many would be aware that countries adopt dual foreign currency rates when it is faced with extreme economical shock. Under this system country's currency can be exchanged for two different currency exchange rates.

It is not something like fixed or floating forex rates system but a combination of both of them wherein two different foreign currency rates can be used at the same time for the same currency. In other words both fixed and floating currency exchange rate co-exist under the dual exchange rate system. Fixed forex rates apply only to current ...
... account transactions related to imports and exports of the country. Floated currency exchange rates which change as per the market situation apply for transactions in the capital account as transactions in this account are more important to a country's foreign reserves.

Though the concept of trade remains similar in dual currency exchange rate system, market remains affected as it is divided into different segments based on the foreign currency rates, fixed or floating. For current account transactions importers of essential goods to an economy can thus have advantage over importers of luxurious goods. Floating currency exchange rate affects transactions related to capital account.

Why it becomes important for a country to adopt dual currency exchange rate system? The biggest benefit of dual foreign exchange rate is that it is highly changeable and an effective tool to assuage additional pressure on a country's foreign reserves as investors panic and start to pull out investment. It also acts as a measure of control on local inflation and importer's demand for foreign currency. Above all it is one of the best arrangements through which government can efficiently pilot foreign currency transactions. They can be also used as an alternative to buy time so that they can fix the ups and downs in their balance of payments.

Foreign reserves are very precious to a country and hence it is very important for it to maintain them and dual foreign exchange rate helps them to do this. Demand for foreign exchange increases in situations when the economy is hit hard. Increased demand can eventually drain up the country's foreign reserves. Hence the government uses the dual foreign exchange rate system to divert this increasing demand to the free floating market which directly affects demand and supply. It has in turn proved to be the absolute option to handle situations like this by imposing taxes or tariffs.

There is too much to the economy of the country. It is simply impossible to know all that exists like dual Currency exchange rate - an effective way to restore foreign reserves.