eli5 How can Iraq decide their currency value when other currencies are based on Forex market? Additionally what stops them from making the currency super valuable?
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There are three things a country might (or might not) like to do with their currency: of which they must choose at most two:
* “Fixed” or “Pegged” exchange rate. Iraq, as you noted, has done this. So did Malaysia, for a few years after the Asian Financial Crisis of 1997. Most countries do not bother with this, since it’s usually doesn’t have any obvious advantages.
* Free flow of money in and out of the country. This makes trade much easier, of course.
* Control over monetary policy – for example, countries often like to be the ones to decide how much of their currency is available.
The reason countries can choose at most two of these is this. Suppose they want to fix their exchange rate.
* If money can freely flow in and out of the country, then (as /u/Phage0070 noted), the country must buy (and destroy) or (create and) sell its own currency, in order to be a “market maker” that keeps the price within an “acceptable” range. Since their money supply is determined by market whim, they have lost control over their monetary policy.
* The alternative is to impose laws on currency traders within the country to ensure the desired exchange rate is maintained, and then to impose strict laws on the movement of currency, so that people can’t efficiently exchange the money overseas. This is what Malaysia did after the Asian Financial Crisis – they eliminated high-denomination banknotes, for example, and imposed strong limits on how much Malaysian cash a traveler could carry with them, as well as laws affecting banks directly.
* Most wealthy countries allow (relatively) free flows of money, and maintain control of their monetary policy – but that means their exchange rate is variable.
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