As Winston Churchill said at the Bretton Woods Conference, there is nothing like discussing foreign currencies and their exchange rates to make a man look wise and foolish at the same time. Not much speculation is employed when talking about Croatian kuna, with a exchange rate claimed by the creators of economic policy to be neither overvalued nor undervalued.
Value is set by supply and demand on the forex markets.
One of the memorable displays of the forex market reality was when Deputy Prime Minister Borislav Skegro waved a DEM 100 bill with the challenge to offer a better exchange rate for DEM than the one already on forex rate lists. It is certainly easier to defend market stability with DEM 100 than USD 100 million, as was case when the Government tried to convert dollars into kuna after selling Pliva on the international market in the spring of 1996. 1996's Easter holidays showed the nature of a domestic forex market that did have enough room to absorb an increased foreign currency supply. Bankers tired of the kuna deficiency resulting from an overly-restrictive monetary policy and the inflexible CNB did not want to buy foreign currency or alter the exchange rate despite the pressure from the supply side. Admittedly, this was the case of a huge foreign currency inflow when banks were unrehabilitated and the CNB was watching foreign currency purchases closely.