Main Title: Foreign Exchange Rate
Name
Penn State University

Main Title: Foreign Exchange Rate

There have been stable foreign exchange markets in one form or another for centuries. Their stability can be linked to the fact that there was no real speculation before WWI. Between the years of 1931 and 1973, the foreign exchange markets went through drastic modifications and by 1973, the creation of the modern foreign exchange market, or FOREX, was set in motion.
In 1944, the Bretton Woods Accord was created in order to create a stable international monetary environment, which then made the US dollar become the benchmark currency rather than gold. To its demise, it ultimately achieved its goal and was abandoned by 1971 when the US dollar as no longer able to be converted into gold. This was due to former President Nixon's suspension of the gold convertibility.
European countries such as West Germany, France, Italy, the Netherlands, Belgium, and Luxemburg created the European Joint Float in 1972. However, by 1978, this also failed. "..The collapse signified the official switch to the free-floating system" (gftforex.com), and at this time, governments were able to use the new free floating systems for their currencies, semi-peg or peg their currencies against others. While in 1979, the European Monetary System, another system of fixed rates was introduced. "This attempt to fix exchange rates met with near extinction in 1992-1993, when built-up economic pressures forced devaluation of a number of weak European currencies"(universityforex.com). With this failure came a combination of the Bretton Woods Accord and the European Monetary System. This new system allows "..major currencies, such as the US dollar, Euro, British pound, Swiss franc, and the Japanese yen to move independently from other currencies"(gftforex.com)
Debate on currency speculators and their effort on currency devaluations and national economic regularly repeats itself. Regardless, many economists have disputed that speculators perform the important function of providing a market for hedgers and passing risk from those people who wish to bear it, to those who do. However, we can look at other economists who consider this argument to be based more on politics and a free market philosophy than on economics itself. Large hedge funds and other well capitalized "position traders" are the main professional speculators.
Currency speculation is considered a highly dubious activity in many countries. While investment in traditional financial instruments such as