A currency board issues notes and coins convertible on demand into a foreign anchor currency
at a fixed rate of exchange.
Furthermore, the consequences of being a major anchor currency
would be particularly problematic for the euro.
Under a currency board, domestic interest rates are expected to be broadly aligned with interest rates prevailing in the country of the anchor currency
. In the case of Hong Kong, this means that monetary policy is mostly passive and interest rates follow the US monetary policy cycle.
These monetary liabilities are freely convertible into a reserve currency (also called the anchor currency
) at a fixed rate on demand.
dollar as an anchor currency
for the world economy is much higher today than it was when the GCC countries hard-pegged to the American currency in the late 1970s and early to mid-1980s.
In this context, ASEAN countries have often been considered highly credible candidates for a currency union (McKinnon 2004; Bayoumi and Eichengreen 1997), although economists differ on the question of which anchor currency
to select (Alesina and Barro 2002; McKinnon 2003; Plummer and Wignaraja 2007).
In the meantime, the US dollar will remain the world's main "anchor currency
," and will continue to maintain this position by virtue of being the dominant reserve currency and the intervention currency in exchange markets, and for invoicing in international trade.
Since 1971, the dollar has not been freely convertible to gold, but the dollar, faute de mieux, remains the system's anchor currency
. Other, more reputable economists have wrestled with this dilemma, and their remedies, while more plausible than a reversion to gold, are not reassuring.
The contribution of the official sector to the international use of foreign currency consists in using it as anchor currency
, intervention currency or for denominating exchange reserves in that currency.
This policy is known as a "crawling peg", whereby a currency is pegged to an anchor currency
(the US dollar in this case) but the peg is adjusted occasionally to reflect changes in macro dynamics.
In this regard, beginning in the mid-1960s, Caribbean economies pursued an exchange rate anchor, with the pound sterling as the anchor currency
. The global crisis that emerged in the 1970s resulted in a switch to a US dollar anchor that is still in place, with some level of variation in all of these economies, except for Guyana, Jamaica and Trinidad & Tobago, who, by virtue of their involvement with the IMF, were required to adopt monetary targeting.
"The only good argument for changing the fix would be if the dollar became unstable or it declined as the premiere anchor currency
," said Mundell, who has recently become an adviser to the United Arab Emirates central bank.