Currency pegs are one of the basics of understanding how currencies interact with each other. The most notable of these is the gold standard. Everyone pegged the worth of their currency to how much gold they kept in reserve, leaving merchants to do what they did best and facilitated trade with terms everyone could understand and rely on. It created a simple system that helped to increase international trade.

Definition of 'Currency Peg'

A country or government's exchange-rate policy of pegging the central bank's rate of exchange to another country's currency. Currency has sometimes also been pegged to the price of gold.

Also known as a "fixed exchange rate" or "pegged exchage rate."

However, now that we've move away from the gold standard, currency pegs can be more confusing and carry many political and trade ramifications with them. Here is the (very) quick and dirty on what an overvalued or undervalued currency peg may mean and some famous examples. Click on the linked text for source documents.

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Undervalued Currency Peg

China pegged their currency against the US dollar in a fixed exchange rate. With currency markedly low, this opened up Chinese exporting to a very large scale and audience, allowing China’s economy to grow at a remarkable pace. This has caused complaints from foreign competitors that they lose business due to the low prices of Chinese goods. However, many other foreign businesses have profited from the low cost of good and through them consumers have gained as well.

A 2011 article in Reuter’s claimed: The department said it concluded China did not meet the U.S. legal definition of a currency manipulator due to the appreciation of its currency -- known as the yuan or renminbi -- since June 2010 and recent Chinese statements that it would continue to promote exchange rate flexibility.

It did not escape these accusations in 1992 or 1994 when the US did give them a currency manipulator label, making them one of the last countries to receive that label more than 18 years ago. As of April 2013, the renminbi hit a record high against the dollar, yet their currency is still significantly undervalued and they are under political pressure to rectify this. With Chinese currency appreciating, the cost of their goods is expected to rise and they may lose an advantage to their exporting sector. With costs of exports rising, it is also affecting importers of good with increased prices. More flexible currency exchange would start to position the renminbi as a true world currency given the growing strength of the Chinese economy which will have a number of unknown affects for global trade and policy.

Overvalued Currency Peg

An overvalued currency is one where the exchange rate is higher than others. A strong currency reduces the appeal of exporting to other countries due to goods being more expensive. However, it lowers the cost of imports allowing people to benefit from a strong currency to gain access to foreign products at attractive prices. Domestic demand for certain goods might be lower due to the consumer cost being higher than comparable imports, again giving the advantage to foreign firms at the expense of domestic companies. There is a conflict at times between people who want a strong currency, yet also want their local businesses to thrive. Many times, these two things cannot coexist.

An example of a developed country currently suffering ill effects is Australia. Right now the Australian dollar is seen to be one of the most overvalued in the world. When hard economic times hit, it is harder to recover with such a strong dollar. Australia is starting to take action to depreciate their dollar to come more in line with international standards (Greber, 2013). By doing so, they will be able to increase internal growth and hopefully bolster their slowly struggling economy.

Okay, long story short, I'm helping to build out an online marketplace. I've been reading the reviews of online sellers when they compare online platforms and one of the big issues that comes up is the lack of branding opportunities offered by the larger sites. Now, I think this is a very valid complaint, however I also believe that a business will probably miss out on a lot of sales through going it alone. Small businesses, for example, generally don't have the time, money, or know-how to brand effectively and this pulls those resources away from actually making money using the draw of a larger host site. So let's present the argument, shall we?

The ultimate showdown. Seriously, don't question my themes
too much here. Click picture for source.

Branding or Sales?

For any small business owner or marketing guru, you will know the power of branding. Getting your name out there and connecting your message to your name in people's mind is money in the bank. Managing that brand can also be a beast. Since your brand is your image, anyone posting inappropriate messages on social media, using the wrong logo, or using your name can be detrimental to your reputation. But what is the priority of branding compared to your sales? That will depend on your focus and what you hope to accomplish. In the world of online marketplaces, which you choose will depend largely on what your product is. Especially for small businesses this can be a fine line to walk.

On one hand, cash is king and driving those sales in a marketplace geared towards sales using the power of the host site can help do that. However, once you get that sale you're next goal is getting a second sale, then a third from the same dedicated client. Chances are you were found randomly out of the sea of competitors. This is both good and bad for you. You were the best of the best for that purchase. Problem is unless you really drive home not only the value of your product but the value of your company, you may not be the best for their next purchase.

Now on the other hand, having the control to shape the user experience can be powerful. If you attract them to a handsome shop that is easy to navigate and allow them the opportunity to view the value of your brand everywhere then you might not only get them hooked but start to build the seed of brand recognition in their minds. The problem is getting them there in the first place. The marketplace - online and in person - is awash with a sea of similar companies all vying for their attention. So you may create a repeat customer but that's assuming you can snatch them in the first place.

This doesn't have to be an either/or scenario. You can quite easily take advantage of both approaches to take advantage of the benefits. But you're a small business right? Do you have the time? Especially if this is your side gig, you might want to seriously think about which approach might get you the best bang for your time and money so you can focus more.

Build Your Brand

If your product is something that is highly unique to you or your process, then going it alone might be a viable option. If what you do is truly irreplaceable or there are few competitors - think high end art, jewelry, fashion... yachts - then you can focus on drawing attention from marketing efforts in ads and publicity. It is much easier to build a fanbase for a highly sought after product or something that is not as easily found. Then you can vogue for all your worth and build a customer experience that's valuable or just build up your own name. It's easier to point people towards your own art showing than your storefront banner in the middle of the gigantic interwebs free-for-all.

Focus on Sales

Now if you're in retail, let's be real here: you are probably not unique. Not really. Yours might be the only product of its exact kind, but there are lots of nearly similar items that can be substituted. Some people don't like to hear this, but recognizing this fact will get you a lot farther a lot faster. I say throw yourself in the mix right away. Are there replacements? Yes, but find your advantage and work the shit out of it. If you make a mean Christmas stocking, then that free gift wrapping and holiday delivery option is going to hook someone. Once you get them, stand out by doing what you do well and asking them to come again.

The other consideration is capacity. Marketing is key for driving sales in the first place, but the size of your operation will dictate how much time you can spend on that. Be realistic about this guys; it takes more time than you think. Letting someone else draw people in for you saves yourself a lot of work, not to mention the money you might throw into other advertising efforts.

Tips for Working a Hybrid

Okay, yeah it's a liger. What hybrid were
you thinking? Click picture for source.

Offer them something they can't find by staying on the host site. More than likely, that's where they will find you and make their first few purchases. However, you can control your brand and make a higher margin selling on your own without the fees associated with most sites. The bottom line is that they won't see value in your own site if it's the same thing. So offer your most special pieces on your own. Make it easier for them to place custom orders or buy in bulk. Offer gift-wrapping options or the ability to create baskets of related items as presents. Offer free gifts, discounts, or frequent buyer programs. If you make it a special experience with value that speaks to them, then you can draw them in and still make sales from everyone else that you can't make a repeat customer. Just make sure you have the time to spare to do it right that won't detract from your quality of product or customer service.

SLOWLY GROWING

Economics Buffet: Currency Pegs in 5 Minutes