‘Dollarization’--and Other Terms of Note

In recent years, the global financial system has been rocked by turmoil over the value of money, from Asia to South America. In the process, terms that were once limited to scholarly debate have migrated to the front page:

“Dollarization”: This refers to efforts by nations to adopt U.S. dollars as their domestic currency. In a complete dollarization, as Argentina is considering, the dollar would replace the existing domestic currency altogether.

Currency zone: A group of countries may choose to give up their own currencies for a new, regional form of money that they hope will foster economic growth and stability, as 11 European nations are doing with the euro.

Currency board: Some countries seek to protect the value of their currency by backing it with the guarantee of a respected foreign currency, usually the U.S. dollar, or gold.

Fixed exchange rate: A nation might try to preserve its currency’s value at a certain level. This can be done by manipulating interest rates and government intervention in foreign exchange markets. But as Thailand and other nations learned painfully in recent years, market forces can overwhelm such efforts and send a currency plummeting.

Floating exchange rate: Governments may choose to let the market determine the value of their money, as most rich nations do.