The practice of pegging GCC nations’ currencies to the dollar of the USA has been around for several decades and has given many benefits to countries like the United Arab Emirates and Saudi Arabia. The currencies of these regions have been pegged to the USD since the 1980s. Now the question arises, why do nations peg their money to the US dollar, and how do they benefit from it? 

Kavan Choksi- Understanding the dollar currency peg 

The dollar peg takes place when a nation maintains the value of its currency at a fixed rate of exchange against the US Dollar. The Central Bank of the country has control over the currency value, so it increases and drops with the dollar’s value. The USD is a floating currency, and its value fluctuates in the market. 

Business and finance expert Kavan Choksi states there are about 66 nations across the world that use the dollar as a legal tender or have pegged their currencies to it. The dollar is famous because it is the reserve currency of the world after global leaders gave it this privilege in the 1944 Bretton Woods Agreement. After the dollar, nations have pegged their money to the Euro, and there are almost 25 nations that have pegged their currencies to it. All of the 19 member nations in the Eurozone use it as their national currency. 

How does the currency peg to the US Dollar work in the market?

The dollar peg deploys a fixed rate of exchange where the central bank of the nation promises to issue you a selected currency amount of the government in exchange for a dollar. The country should have a large volume of dollars to maintain this peg. It is due to the above reason that a lot of nations that are using the US dollar as a peg are enjoying significant exports to the USA. These companies receive their payments in dollars, and they exchange them for paying their domestic workers and suppliers. 

Role of the Central Bank in Currency Pegging

The Central Bank of these nations uses these dollars to buy US Treasuries so that they can get interested in their dollar holdings. In case they need to raise funds to pay their companies, they can use these Treasuries in the secondary market. 

The Central Bank of the nation will monitor the rate of a currency relative to the value of the dollar. If the value of the currency falls below this peg, it has to increase its value and reduce the value of the dollar. This can be achieved by selling the Treasuries in the secondary market so that their value decreases, along with the dollar’s value. In this manner, the currency peg is restored. 

Maintaining the currencies equally is challenging since the value of the dollar changes rapidly. This is why some nations peg the value of the currencies to a range of the dollar in place of a precise number. The benefits of currency pegging are that it boosts trade and foreign investments in the region, according to business and finance experts. Kavan Choksi, increases the wealth of the area and promotes economic growth as well.