Can someone explain the currency in Peru to me?

[Elta]

According to the Economist, Peru is the only really poor country in Latin America with a government that is making the right economic decisions right now.



But I am having trouble wrapping my head around how their currency works.


From what I've gathered, they have chosen the U.S. dollar as their currency, but they make coins they call centavos (Cents) which are = to U.S. coins. So 10 centavo coin = a dime.


Are there only as many centavos printed as can be redeemed for U.S. dollars on hand in the banks? Or do they just mint them and put a forced exchange rate on them?

I am really confused as to how this affects inflation and such.


Help?

 

[aelf]

Are there only as many centavos printed as can be redeemed for U.S. dollars on hand in the banks? Or do they just mint them and put a forced exchange rate on them?

Could be either. But the latter option would be much more expensive since they have to maintain the rate.

I am really confused as to how this affects inflation and such.

It pegs the Peruvian inflation rate to the US inflation rate?

 

[Mise]

Are you sure you mean Peru...? The currency in Peru isn't the US Dollar (it's the Nuevo Sol), it isn't 1:1 with the USD (it's currently 3:1), and it isn't even pegged to the US Dollar (its central bank operates under an inflation target of 2%).

Also, everything aelf said is wrong... Maybe I should leave this to JH or someone to explain it better, but a currency is far more than simply the amount of coinage in circulation. Additionally, attempting to quantify the exact amount of currency in circulation is very, very difficult and ultimately futile. It is not cheaper to somehow magically hold as many Dollar bills in the bank as Peruvian bills in circulation, nor would that actually maintain a dollar peg, even if it were possible to do that.

The second thing that aelf said is also wrong: if the Peruvian currency is pegged to the US Dollar, Peruvian inflation will of course be different to US inflation, exactly because of the dollar peg!

So anyway to avoid going into that sort of thing in more detail, are you sure you mean Peru?

 

[Till]

Ecuador is using the US Dollar as currency. Peru's currency is not pegged to the dollar in any way, as Mise said.

The Nuevo Sol is noteable for being the most stable currency in South America:

Hitherto the nuevo sol currently retains a low inflation rate of 1.5%.[3] Since the new currency was put into effect, it has managed to maintain a stable exchange rate between 3.3 and 3.00 nuevo soles per United States dollar.

Out of all the currencies of the Latin-American region, the Peruvian nuevo sol has been the most stable and reliable currency, also being the currency least affected by the weak dollar global tendency. During the late months of 2007 and the first months of 2008, the rate fell to 2.69 nuevos soles per USD, a rate not seen since 1997. As of June 2008 the dollar went up again and is trading at 2.94 nuevos soles per USD. In late November 2008 one USD equaled 3.09 nuevo sols.

 

[aelf]

Also, everything aelf said is wrong... Maybe I should leave this to JH or someone to explain it better, but a currency is far more than simply the amount of coinage in circulation. Additionally, attempting to quantify the exact amount of currency in circulation is very, very difficult and ultimately futile. It is not cheaper to somehow magically hold as many Dollar bills in the bank as Peruvian bills in circulation, nor would that actually maintain a dollar peg, even if it were possible to do that.

The main qualities of an orthodox currency board are:

* A currency board maintains absolute, unlimited convertibility between its notes and coins and the currency against which they are pegged, at a fixed rate of exchange, with no restrictions on current-account or capital-account transactions.
* A currency board's foreign currency reserves must be sufficient to ensure that all holders of its notes and coins can convert them into the reserve currency (usually 110–115%).
* A currency board only earns profit from interest on reserves (less the expense of note-issuing), and does not engage in forward-exchange transactions.
* A currency board has no discretionary powers to affect monetary policy and does not lend to the government. Governments cannot print money, and can only tax or borrow to meet their spending commitments.
* A currency board does not act as a lender of last resort to commercial banks, and does not regulate reserve requirements.
* A currency board does not attempt to manipulate interest rates by establishing a discount rate like a central bank. The peg with the foreign currency tends to keep interest rates and inflation very closely aligned to those in the country against whose currency the peg is fixed.

From here. I think the confidence that it's supposed to inspire would make it less necessary to use up foreign currency reserves to maintain the rate.

The second thing that aelf said is also wrong: if the Peruvian currency is pegged to the US Dollar, Peruvian inflation will of course be different to US inflation, exactly because of the dollar peg!

Theoretically, it is correct. But a cursory search for a good concise source failed and I'm too lazy to look some more.

 

[Mise]

Yes, you can convert your local currency into dollars at a bank. I can do that here in the UK, with no currency board, no fixed exchanged rate, and no dollar peg. What's your point? The second bullet point simply states that there are enough foreign reserves to support the value of the currency; this is true for any currency, dollar pegged or not. The first bullet point says that there are no restrictions on the exchange of local currency for the pegged currency; but all currencies are fully convertible in capitalist nations of Europe and North America.

And neither at all related to whether a bank physically holds as many dollar bills as local bills!

Anyway to save you more searching, a fixed exchange rate is maintained by the central bank buying the currency on wholesale markets if the exchange rate falls and selling if the exchange rate rises.

 

[aelf]

Yes, you can convert your local currency into dollars at a bank. I can do that here in the UK, with no currency board, no fixed exchanged rate, and no dollar peg. What's your point? The second bullet point simply states that there are enough foreign reserves to support the value of the currency; this is true for any currency, dollar pegged or not. The first bullet point says that there are no restrictions on the exchange of local currency for the pegged currency; but all currencies are fully convertible in capitalist nations of Europe and North America.

And neither at all related to whether a bank physically holds as many dollar bills as local bills!

Don't the points cover your objections? They state unlimited convertibility and the fact that all holders of its notes and coins can convert them into the reserve currency. That means all holders of the currency know that they can readily change all their money to the reserve currency at the fixed exchange rate whenever they want. If credible, that would have a stabilising effect on the exchange rate and reduce the need to spend on maintaining it.

The list isn't meant to state the obvious that can happen anywhere, you know.

 

[Mise]

Aelf, seriously, if you don't know what you're talking about, it's best not to say anything at all...

It's obvious that you don't know how fixed exchange rates work, I've now explained it, so please stop this nonsense...

 

[aelf]

Aelf, seriously, if you don't know what you're talking about, it's best not to say anything at all...

It's obvious that you don't know how fixed exchange rates work, I've now explained it, so please stop this nonsense...

Well, whatever.

 

[Phlegmak]

Are you sure you mean Peru...? The currency in Peru isn't the US Dollar (it's the Nuevo Sol), it isn't 1:1 with the USD (it's currently 3:1), and it isn't even pegged to the US Dollar (its central bank operates under an inflation target of 2%).

All of that is correct.

Also:

* Peruvians have a significant problem with counterfeit paper money (counterfeit soles, not dollars).
* US dollars are very common, and are usually taken as acceptable payment at any store.
* The euro might be gaining similar acceptance these days.

 

[Elta]

Ecuador is using the US Dollar as currency. Peru's currency is not pegged to the dollar in any way, as Mise said.

The Nuevo Sol is noteable for being the most stable currency in South America:

I meant Ecuador

I was a little buzzed still when I posted this so I got mixed up....... okay I am lying, I was pretty much drunk.

http://en.wikipedia.org/wiki/Currency_of_Ecuador

Same question different country different question, from what I gather they use U.S. dollars and print centavos out.