Believe it or not, there was once a time that every currency was pegged to the US dollar. Following World War II, 44 allied nations pulled together to peg their currencies to the US dollar with US officials promising that the dollar would then be pegged to a certain weight of gold.
Under the above agreement, also known as Bretton Woods, international trade would be conducted in dollars. If a country were to run a trade deficit or surplus, it would be settled at the end of each year by the transfer of gold from one country to another at the International Monetary Fund.
When this system changed, the virtual peg of currencies to the US dollar was removed, however, many currencies were still pegged to the dollar.
Currencies Pegged to the US Dollar
Currencies once pegged to the US dollar include:
Florin
Bahamian Dollar
Bahraini dinar
Barbadian dollar
Belize Dollar
Cayman Islands dollar
Djibouti franc
East Caribbean Dollar
Nakfa
Jordanian dinar
Lebanese lira
Rufiyaa
Omani rial
Qatari riyal
Riyal
Bolivar
United Arab Emirates dirham
Chinese Renimbi (yuan)
Today, only a few of these currencies are still pegged to the US dollar. Since 1971, many governments decided that it may not be in their best interest to peg to the US dollar, and instead allow the market (forex) to decide exchange rates.
Chinese Currency Peg
The Chinese Renimbi, or yuan, is one of the currencies that is most likely to come up in discussion regarding currency pegs. Politicians and pundits alike offer up the suggestion that by keeping the Renminbi artificially low against the dollar, China can create a massive trade surpluses.
In contrast to this view, others suggest that China is getting the short-end of the stick. In fact, in order to maintain an artificially low Renminbi valuation, the Chinese government has to purchase US dollars. Rather than purchase US dollars, which do not provide a rate of return, the Chinese purchase US debt obligations, or US Treasuries.
While this system has proven to be a boon for China, some suggest that the Treasuries may never be repaid as the United States runs significant annual deficits. Chinese officials, realizing that it has become one of the largest creditors to the United States, have suggested that China stop buying US Treasuries and allow the Renminbi to float freely. Recently, a Chinese news source suggested that one of the many representatives from the Chinese central bank said that he would favor a 66% reduction in US debt holdings.
