The importance of the dollar grew steadily after World War I and this was officially recognized when the dollar became the
anchor currency in the global system under Bretton Woods.
This was not done as it was considered important to be able to continue to say that the KM exchange rate against the
anchor currency had been set in 1997 and it had not changed and it would not change.
If these perceptions are true, then the emerging economies in the South Asian region such as India, Pakistan, Bangladesh, and Sri Lanka will have to make a choice for an
anchor currency for their financial dealings and transactions.
Responsibility for monetary policy would be coordinated by the
anchor currency area.
A central bank trying to maintain an exchange rate peg will focus on the interest rate differential between the short-term rate in its domestic currency and the prevailing short-term rate in the
anchor currency.
Under the CBS, the Rupiah needs to be pegged to an
anchor currency which is strong and realiable to the global market.
And, finally, the
anchor currency and the underlying eco-system of world trade often outlive the geopolitical decline of the anchor country by decades.
It is a monetary authority that issues notes and coins convertible on demand into a foreign
anchor currency at a fixed rate of exchange.
In this type of system, private sector arbitrage serves to keep interest rates and inflation expectations broadly in line with the
anchor currency economy, thereby obviating the need for persistent intervention by the monetary authority.
In the context of the EMU it is worth mentioning that in addition to the German mark, Finnish markka and Swedish kronor, the ECU was also considered a possible
anchor currency for the Estonian CBA in 1992.
The dollar is a high candidate as the
anchor currency because it is at present the only global currency.
It is these flawed exchange rate policies, especially the fixed peg policy and the peg to a single
anchor currency, that eventually caused the operational distortions that weakened the region's banks and prompted the crisis.
