The currency basket serves as a benchmark for exchange rate policy to determine the real exchange rate of the national currency in relation to other currencies. Its main varieties are multicurrency and dual-currency baskets.
Objectives and Benefits of Using the Dual Currency Basket
The bi-currency basket consists of two currencies, while the multicurrency basket contains several currencies. The multicurrency basket is more commonly used when creating international currency units. The most famous example is the international unit of account, Special Drawing Rights, used by the IMF. The rate of this multicurrency basket is pegged to a basket of five currencies: dollar, euro, yen and pound sterling. The basket weights are reviewed every five years. It is precisely due to the fact that in practice the dual-currency and multicurrency baskets have different purposes, it is inappropriate to talk about the advantages of any of them.
The value (share) of a particular unit in the bi-currency basket is determined by economic realities. It varies from country to country. The basis for determining the share can be the share of the currency in international settlements or the share of the country in the total gross product of all countries. Therefore, due to the fact that the world economy does not stand still, the ratio of currencies in the dual-currency basket can also transform.
The dual-currency basket model is more balanced than targeting only one currency. So, for example, until 2005 Russia was guided in the ruble exchange rate only by the dollar. However, the change in the economic situation, the strengthening of the role of the EU and the euro in the world economy made it necessary to introduce a new benchmark - a dual-currency basket, including the dollar and the euro. The focus only on the dollar also made the Russian ruble highly dependent on its changes.
The dual-currency basket allows the use of an average indicator of the value of currencies in calculations and excludes the influence of external factors, in particular, fluctuations in the exchange rate of the euro against the dollar. It also makes it possible to maintain a balanced exchange rate of the national currency and keeps inflation in check.
The dual-currency basket serves as a reference point for the Central Bank of the Russian Federation in its exchange rate policy. The Central Bank intervenes in trading when it sees an increased demand for currency, as a too strong national currency creates serious export risks and can reduce the competitiveness of the country's goods on the world market. On the other hand, a sharp depreciation of the national currency is also a negative phenomenon, since often leads to higher prices for goods in the domestic market.
Dual currency basket in Russia
Initially, it consisted of 0.1 euros and 0.9 dollars. Subsequently, the share of the euro was constantly increasing, and by 2007 it began to include 0.45 euros and 0.55 dollars. The formula for calculating the bi-currency basket is extremely simple: (0.45 * euro rate) + (0.55 * dollar rate).
The bi-currency basket reached its minimum value on August 5, 2008 - 29.27 rubles, the maximum in 2014 - 43.08 rubles.
It is worth noting that in Russia the Central Bank allows the bi-currency basket to change within an acceptable range of fluctuations, which is called the bi-currency corridor.
