Fixed Exchange Rate

A fixed exchange rate refers to an exchange rate system in which the exchange ratio between a country's currency and another country's currency is basically fixed, or the fluctuation range is limited to a very small scope (usually no more than 1%). In foreign trade, fixed exchange rates are often used to lock in costs and profits when signing long-term contracts or large orders, avoiding losses caused by severe exchange rate fluctuations. Use cases include: export quotations, import cost accounting, cross-border financing, and letter of credit settlement. Precautions: A fixed exchange rate is not absolutely unchanging and may be adjusted due to central bank intervention or revaluation; if the domestic currency is overvalued, export competitiveness declines; if it is undervalued, it may trigger trade frictions. Compared with a floating exchange rate, a fixed exchange rate has high stability but poor flexibility; unlike a pegged exchange rate, a fixed exchange rate usually has a legal parity and intervention obligations. Foreign trade practitioners need to pay attention to central bank policies and foreign exchange reserves to assess the sustainability of a fixed exchange rate.