Market-Basket Currency Essay

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A market-basket currency is a form of money (medium of exchange) whose value is determined as a weighted average of the value of other currencies. The term is often confused with the term currency basket, which is actually the group of selected currencies. Typically, the currency  basket is composed  of a diverse set of four to eight currencies  from around  the world with no one currency holding a majority. As a composite, market-basket currencies are often used to reduce the risk associated with currency exchange rate fluctuations, especially compared  to currencies  pegged (or fixed) to one other currency. Governments  have created  market-basket currencies  in response  to  local currency fluctuations that threaten  their economy.

Market-basket  currencies have been used since the 1970s after the collapse of the Bretton Woods Accord. For example, the  European  currency  unit  (or ECU) was created in 1979. The ECU was composed of a currency basket of all European  Community  currencies, mainly the British pound sterling, the German  mark, the French franc, and the Italian lira. Although it was initially planned as the common currency of the European Community, it was replaced by the euro in 1999.

Israel has used a market-basket currency, the shekel, since 1986 (and from 1976–77). Originally, the shekel was based on the  U.S. dollar, German  mark, pound sterling, French franc, and Japanese yen until 1999, at which point the mark and franc were exchanged with the euro. In 2005 China changed the peg of their currency, the renminbi,  to the U.S. dollar and converted to a floating exchange rate based on a market  basket of foreign currencies  including  the U.S. dollar, euro, Japanese yen, South Korean won, British pound, and others. From 1975 to 2003, Kuwait’s dinar was a market-basket currency, but was pegged to the U.S. dollar on January 5, 2003. Kuwait repegged the dinar to a currency basket in May 2007. The Cooperation  Council for the Arab States of the Gulf (GCC) plans to create a market-basket currency, the khaleeji, by the year 2010. The GCC  is composed  of Bahrain,  Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

In response to the Asian currency crisis of 1997, the Association of Southeast  Asian Nations, or ASEAN, has  proposed  the  creation  of  the  Asian  currency unit (ACU) as a market-basket currency for member countries  China, Japan, and Korea to stabilize financial markets  in the region. Although the project has endured several obstacles, discussions continue.

Special Drawing  Rights  (SDR) are  considered  a market-basket asset such that it is determined from the market exchange rates of the U.S. dollar, euro, Japanese yen, and British pound  sterling. It is revalued once every five years.


  1. Campbell McConnell  and  Stanley  L Brue, Microeconomics: Principles, Problems, and  Policies (McGraw-Hill  Professional, 2004);
  2. Eiji Ogawa and Takatoshi Ito, “On the Desirability of a Regional Basket Currency Arrangement,” Journal of the Japanese and International Economies (v.16/3, 2002).

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