Recent Foreign Exchange Developments

We shall discuss here the main phases of recent foreign exchange developments of modern era. These include the following listed developments:

• The Signing of the Bretton Woods Accord
• The Establishment of the International Monetary Fund (IMF)
• The free-floating foreign exchange markets
• The constitution of currency reserves;
• The formation of the European Monetary Union and the European Monetary Cooperation Fund
• Introduction of new currency - Euro

The signing of Bretton Woods Accord is considered one of the most important recent foreign exchange developments in the modern times of forex history. This accord was signed in July 1944 by three countries- The United States, United Kingdom, and France. These three nations signed the agreement which said that these countries would work towards making the currency market stable, particularly due to governmental controls on currency values. There were two major goals behind putting this agreement into action. These were to provide the pegging of currencies and the formation of an International Monetary Fund (IMF). According to the Bretton Woods Accord, the major trading currencies were pegged against the $US in a way that the currencies were allowed to fluctuate only one percent on either side of that rate. When a currency exceeded this range, marked by intervention points, the central bank n charge had to buy it or sell it, and thus bring it back into range. As a result of this, the $US was pegged to gold at $35 per ounce. In this way, thr $US became the world's reserve currency.

One of the important development in world of foreign exchange in the times happened with the formation of the international monetary fund. The prime concern of International Monetary Fund is to work in tandem with one another and to maintain a stable system of selling and buying of different currencies in the world. This is to ensure that the payments in foreign money can take place between countries smoothly and timely. The IMF lends money to members that have trouble meeting financial obligations to other members, on the condition that they undertake economic reforms to eliminate these difficulties for their own good and the good of the entire membership. In total the main tasks of the IMF are: to promote international cooperation by providing the means for members to consult and collaborate on international monetary issues.

The official mandate to allow the free-floating of currencies came in the year 1978 by International monetary Fund, thus adding a new chapter in the recent foreign exchange developments. This arrangement stated that the currency can be traded by anybody and its value is a function of the current supply and demand forces in the market, and there are no specific intervention points that have to be observed. The Federal Reserve Bank intervenes on and off to change the value of the U.S. dollar however but no specific levels are ever imposed. This results in a heavy demand for free floating currencies trading in forex markets.

Since liquidity has been an indispensable condition in forex markets, there was a need for a tool which could protect investments done by big traders and large financial firms in the times of economic or political instability. To deal with these kind of problems, another development in world of foreign exchange happened with the formation of currency reserves. The U.S. dollar was the reserve currency of the world after the World War II. At present, there are other reserve currencies such as euro and the Japanese yen. The portfolio of reserve currencies may change depending on specific international conditions like for example in future it may include the Swiss franc.

The European Monetary Union was formed as a result of a long series of post second world war efforts which were aimed at the creation of a closer economic cooperation among main and ecumenically important countries of Europe. The main agenda of the European Community commission was to improve inter European economic cooperation; create a regional area of monetary stability. The first steps in this regards were taken in 1950, with the formation of the European Payment Union to facilitate the inter-European settlements of international trade transactions. The prime concern of this community was to promote inter-European trade in general, and to eradicate the confinements on the trade of coal and raw steel in particular. A conference of national leaders in 1969 set the objective of establishing a monetary union within the European Community. This goal was supposed to be implemented by 1980, when a common currency was planned to be used in Europe. In 1978, the nine members of the European Community ratified a new plan for stability—the European Monetary System. The new system was practically established in 1979. West Germany, France, the Netherlands, Belgium, Luxembourg, Denmark, and Ireland were its full members. The UK did not participate in all of the arrangements and Italy joined under special conditions. However, later on Greece joined in 1981, Spain and Portugal in 1986 and Britain joined the Exchange Rate Mechanism in 1990 thus adding a new phase in the recent foreign exchange developments.

Another important event in recent foreign exchange developments, the European Monetary Cooperation Fund was laid down. The prime aim of the EMCF was the effective management of EMS credit arrangements and to increase the acceptance of the ECU, countries that hold more ECU deposits, or accept as loan repayment more than their share of ECU, receive interest on the excess ECU deposits, and vice versa. The interest rate is the weighted average of all the EMS members’ discount rates.

A new currency named as Euro was introduced in 1998. The introduction of Euro is seen as important Forex developments in recent times. The euro was introduced as a currency for entire Europe. The official locking rates for euro were presented by the European Union Commission and the rates were sanctioned by the European Union finance ministers on 31December, 1998 at the launch of euro on midnight, January 1, 1999. The euro bills are issued in denominations of 5, 10, 20, 50, 100, 200, and 500 euros. Coins are issued in denominations of 1 and 2 euros, and 50, 20, 10, 5, 2, and 1 cent. However, the actual starting date for euro is Monday, January 4, 1999.