Currency Contd Like

Currency Contd Like

Currency, (cont�d) Like other prices the foreign exchange rate can be manipulated. Most Governments intervene in the currency market to protect agreed 'pegged' rates of exchange against what are considered as undesirable fluctuations arising from the ebb and flow of trade, unpredictable capital movements or speculative currency dealings. The agreed exchange 'parities' of the seventy or so member countries of the International Monetary Fund are pegged in this way. They may impose positive restrictions on some transactions, such as control imports or capital movements, or operate buffer-stock schemes to supplement free market demand for and supply of currencies to help counter temporary instability (in Great Britain this is the task of the Exchange Equalization Account). But as most domestic policy measures have international 'spillover' effects (e.g. high interest rates in Britain tend to attract foreign funds to London), it is often difficult in practice to isolate the precise effects of state intervention.

An international currency is one widely accepted internationally in the settlement of debts. During the nineteenth century and up to World War 11 sterling was widely accepted as the major international currency; for about fifteen years after the war the major inter-national currency was the dollar; more recently it has weakened. Various international monetary institutions (of which the Inter-national Monetary Fund is the largest and best known) were created to help maintain an orderly supply of national currencies and hence to ensure an adequate quantity of international currency.

'Soft' currencies are those for which international demand is weak, 'hard' currencies those for which international demand is strong. When the dollar was strong after the war, and there was a dollar 'shortage' or 'gap', some economists thought it would remain so for many years, but it became 'soft' in the early 2000's when the American balance of payments ran into deficit.

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