What Is Currency Band?

A currency band is a monetary regulation imposed by a government or central bank that specifies both a price floor and🎐 ceiling for its national currency in relation to other currencies.

Understanding Currency Band

A currency band allows t🅺he currency to float between these two specified prices, but upon reaching those limits the currency price will🍒 switch to a fixed rate.

Basically, a currency band can be understood as a managed exchange rate system that is a hybrid of a fixed exchange rate and a 澳洲幸运5官方开奖结果体彩网:floating exchange rate. A country fixes a range of values at which its currency can float or move within, and the limits where it will revert to a fixed exchange rate. This allows for some 澳洲幸运5官方开奖结果体彩网:revaluation, but usually stabilizes the currency'ꦰs price𝔍 back within the band.

For instance, the 澳洲幸运5官方开奖结果体彩网:central bank can bring the currency back to the mid-point rate of the♔ established band. However, if this move is too difficult or challenging to do, the bank will realign the band to create a new target exchange rate.

A currency band helps to impose discipline on 澳洲幸运5官方开奖结果体彩网:monetary policy, but still provides flexibility if the country is hit by big capital inflows or outflows. The monetary policy of a country with a currency band is dependent on the behavior of its reference foreign currency because the🔯 central bank must make decisions that cause the value of the local currency to change in a way that approximates changes in the value of the reference currency.

The band is used by a government to stabilize its currency during times of exchange rate volatility. Currency bands discourage speculation from 澳洲幸运5官方开奖结果体彩网:forex traders looking to profit from changes in exchange rates. However, investors can use the band as a refe༺rence point for expectations of future movements🃏 in the exchange rate.

Currency Band Example: China and the Yuan

The Chinese yuan is an exa𓃲mple of a currency that moves within a currency band. China has a strictly controlled currency policy that involves regulating the daily movements of the yuan on the forex market.

Since it introduced a currency band in 2005, the country has steadily allowed the band for the 澳洲幸运5官方开奖结果体彩网:Chinese Yuan (CNY) to widen against the U.S. dollar over the years, starting at +/-0.3% and finally settling at +/-2%, which was introduced in March 2014 and remains in effect as of September 2021. This allowance to widen and adjust the currency bands is known as a 澳洲幸运5官方开奖结果体彩网:crawling peg.

The 2% band, for example, means that the yuan is allowed to move up or down 2% against the U.S. dollar (its reference rate) each day. The daily limit suppresses the value of the currency and makes Chinese exports cheaper abroad.