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Fixed Exchange RateA fixed exchange rate, sometimes (less commonly) called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency (most often the US Dollar), to a basket of other currencies, or to another measure of value, such as gold. As the reference value rises and falls, so does the currency pegged to it. A currency that uses a fixed exchange rate is known as a fixed currency. The opposite of a fixed exchange rate is a floating exchange rate. Economists generally think that, in most circumstances, floating exchange rates are preferable to fixed exchange rates because floating rates are responsive to the foreign exchange market. However, in certain situations, fixed exchange rates may be preferable for their greater stability. For example, the Asian financial crisis was ameliorated by the fixed exchange rate of the Chinese renminbi, and the IMF and the World Bank now acknowledge that Malaysia's adoption of a peg to the US Dollar in the aftermath of the same crisis was highly successful. Some countries, like China, do not hold to perfectly fixed exchange rates, but rather adopt currency bands. These allow for small changes in the relative value of currency, but prevent large shifts. For countries adopting a fixed exchange rate, careful and strict adherence to policy imperatives is key, and in the absence of the capital markets' confidence in the management of such a regime, the peg can well fail (see Argentine Currency Board).
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