This book is the result of my research project conducted on Pakistan's external sector and basket peg rule. The study has been divided into two parts. The first part explores the appropriate exchange rate system for improved competitiveness of Pakistan's trade sector. The second part finds out the solution of questions how to determine the optimal baskets and how heavily the Euro and the US dollar ought to be weighed in any such currency baskets. Using the consumer price-based indices, the appreciation, or depreciation of real effective exchange rates applying to Euro and Dollar has been analysed for Pakistan from 1982 to 2005. The results propose that Pakistan's external sector competitiveness ought to be insensitive to Euro and Dollar exchange rate changes. I would like to thank Dr Zafar Moin Nasir and Dr Naheed Zia for their incessant guidance. I also acknowledge the prayers of my parents and my mother in law. I dedicate this book to my affectionate and supportive husband and our adorable daughter Sheeth Rana