(2-12-13) Last Friday President Hugo Chavez announced a major currency devaluation in Venezuela, raising the Bolivar to Dollar exchange rate from 2.15 to 4.30, while the black market rate has remained 6.25 per dollar. The Bolivar has been falling apart because Venezuela can not maintain the Dollar peg. What happened?

A Dollar peg is basically a fixed exchange rate between the Dollar and another currency in order to control the value of its currency and to make their exports to America cheaper.

In countries that maintain a Dollar peg, which are inherently unstable countries in the southern hemisphere, it's the only way they can prop up their currency and then use their currency to settle international trade. However this practice also limits the convertibility of that currency into Dollars in its own currency.

So what's the point? Without a Dollar peg, the currency would simply fall apart and couldn’t be used as a medium of exchange in international trade.