More than 100 countries have fixed exchange rates – although the effect on French Polynesia and Chad of being pegged to the euro is not widely reported. Some economies, such as Panama, are more or less dollarised (or, in the case of Andorra, “euro-ised”). Many currencies are strictly fixed, while others move within trading bands that allow a little more flexibility. Dollar or euro pegs are the most common, although many countries, including Russia and China, use a basket of currencies.

But with the dollar at eight-year lows against the euro, the creaking of some fixed exchange rates is growing louder. A big concern is whether countries in the Middle East and Asia will abandon the dollar pegs that are holding their currencies down. Oil exporters, with huge current account surpluses, are watching inflation tick up but are constrained in their use of monetary policy. The problem is similar in China’s, but swap oil for toys. So far, in most of the dollar block, inflationary pressures have not been intense enough to provoke action, although Kuwait switched to a blended currency peg in May.

The situation is very different for those overvalued currencies tied to the rampant euro. Former communist bloc countries such as Bulgaria and Latvia have asset bubbles, double-digit inflation and yawning current account deficits. In part, this has been caused by low eurozone interest rates, as well as excessive borrowing. With memories of the Asian and exchange rate mechanism crises, speculators are waiting in the wings – smaller foreign currency reserves means that the pegs of some eastern European countries might not survive a concerted attack.

Which countries are vulnerable? One measure of stress is real interest rates. Assuming economies match their base rates with those of the currency zone they are pegged to, Bulgaria stands out with a negative 10 per cent real interest rate. The dollar block is not as stretched, but real interest rates in the United Arab Emirates are still north of 3 per cent. Forget the Middle East and China – the least stable currency pegs may actually be in Europe.

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