Market-Basket Currency Essay ⋆ Business Essay Examples ⋆ EssayEmpire

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.

Bibliography:

Campbell McConnell and Stanley L Brue, Microeconomics: Principles, Problems, and Policies (McGraw-Hill Professional, 2004);
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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