Advantages of Sending a Currency Transfer to a Pegged Currency Account

Advantages of Sending a Currency Transfer to a Pegged Currency Account

In many countries around the world a fixed exchange rate regime is in force, which supports not only the stability of the local financial system but simplifies currency transfers as well. In general, a fixed exchange rate (also a pegged exchange rate or a currency peg) means that the local currency value is pegged to the value of another currency or a currency basket. Most often this is a so-called "hard currency" like the U.S. dollar or the euro. Important from a currency transfer point of view is that no foreign exchange rate will be applicable in the transfer and the recipient will receive the same amount of money, minus fees and commissions, but converted in his/her local currency.

Various types of currency pegs are known; however, it is irrelevant to the average client of money transfer services. As mentioned above, most pegged currency regimes involve the use of a hard currency as a "base" currency to which the local currency is pegged. In addition, there are some countries where a foreign currency is adopted as official national currency. Experts call this process dollarisation because such a process initially involved the U.S. dollar as a currency replacing the local ones.

The most well known cases of dollarisation are Panama, Ecuador and El Salvador where the U.S. dollar is an official currency but you would be surprised how many countries have pegged their currency to the dollar. Those currencies include the Bahamian dollar, the Cayman Islands dollar, the Lebanese lira, the United Arab Emirates dirham, the Chinese Renimbi (yuan), listing only the most prominent ones. Several countries, not only in Europe, have pegged their currency to the euro. Among them are Bosnia and Herzegovina, Bulgaria, Estonia, Lithuania, Latvia and Morocco.

For a sender or a recipient sending money that will be converted into a pegged currency means that both parties will avoid conversion, assuming that the currency transfer is denominated in the same currency as the currency to which the home currency of the recipient is pegged to. If you are sending a certain amount of euro from Germany to a bank account in Latvia, the recipient will receive the same amount converted to his/her home currency, the Latvian lat, without any losses due to foreign exchange rates. However, you cannot avoid bank fees related to the transfer.

On the other hand, you should bear in mind that a pegged currency fluctuates in conjunction with the currency it is fixed to. For example, if you are sending British pounds to Estonia it is a good idea to wait for a moment when the pound is extremely strong against the euro. This will allow the recipient in Estonia to benefit from the stronger pound and receive more euro, more money in the local currency, respectively. This is a two-way process so wait for the British pound to weaken against the euro if you are waiting to receive a currency transfer, which is to be converted from euro into pounds. However, you will have to temporise until the pound restores its positions against the euro to benefit from the overall transfer.

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