Managed currency definition
/What is a Managed Currency?
A managed currency is a currency for which the exchange rate is controlled by a government’s central bank. The government does so by either setting a fixed exchange rate or by engaging in buying and selling transactions through its central bank. Even when a government claims to be letting its currency's exchange rate rise and fall in accordance with the forces of supply and demand, it may be making occasional interventions to stymie unusual exchange rate fluctuations, thereby reducing the level of uncertainty in the financial markets. Some currency management is considered normal, in order to stabilize markets.
Example of a Managed Currency
An example of a managed currency is the Chinese Yuan. The People's Bank of China (PBOC) does not allow the yuan to float freely. Instead, it operates under a managed float regime. The PBOC sets a daily reference rate (midpoint) for the yuan against the U.S. dollar, known as the central parity rate. The yuan is allowed to trade within a specified range, often ±2% of the reference rate. To maintain the yuan's value within the allowable range, the PBOC actively intervenes by buying or selling foreign currencies, particularly the U.S. dollar. The Chinese government also imposes restrictions on cross-border capital flows to limit speculative attacks on the yuan and maintain control over its value.
Taking this approach promotes export competitiveness by keeping the yuan relatively weaker against major currencies like the U.S. dollar. It also maintains economic stability by reducing currency volatility, and supports policy objectives, such as managing inflation or controlling financial imbalances.
China's managed currency approach has often led to accusations of currency manipulation, particularly from trading partners like the United States, who argue that undervaluing the yuan gives Chinese exporters an unfair advantage.
Advantages of a Managed Currency
There are several advantages to having a managed currency. First, it results in a reasonable amount of exchange rate stability. This reduces exchange rate risks for foreign businesses that might want to engage in trade within a country, or invest there. Similarly, it reduces the risk of having any sudden spikes or drops in the exchange rate, which might scare off investors and businesses.