Forex Management Presentationdd

7/24/2019 Forex Management Presentationdd

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INTERNATIONAL

MONETARY SYSTEM


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Why do economies need money? moneyas a unit of account

that is used as a medium of exchange in transactions. Withoutmoney, individuals and businesses would have a harder timeobtaining (purchasing) or exchanging (selling) what they need,want, or make. oney provides us with a universally acceptedmedium of exchange.

!housands of years ago, people had to barter if they wantedto get something. !hat worked well if the two people eachwanted what the other had. "ven today, bartering exists.

#istory shows that ancient "gypt and esopotamia$began touse a system based on the highly coveted coins of gold andsilver, also known as bullion, which is the purest form of theprecious metal. #owever, bartering remained the mostcommon form of exchange and trade.

%old and silver coins gradually emerged in the use of trading,although the level of pure gold and silver content impacted thecoins value. &nly coins that consist of the pure precious metalare bullions' all other coins are referred to simply as coins.


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n international monetary system can be regarded as

(i) the set of conventions, rules and policy instruments

(ii) the economic, institutional and political environmentwhich determine the delivery of two fundamental global

public goods an international currency (or currencies)and external stability.


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*ey +eaturesi-erent urrencies

/nternational +low &f oney

/nstitutional +ramework

etermination of "xchange 0ate

1olitical and "conomic 1olicy

0egulatory +ramework of /nternational onetary 2ystem


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/mportant onstituentsurrency

"xchange 0ate

3eading /nstitutions

1olitical and "conomic /ntegration


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4imetallism/n 5675, most of the world8s leading nations were on abimetallic standard in which both gold and silver served as the

basis for coinage (known as 9specie9).+ollowing the recommendations of lexander #amilton and!homas :e-erson, the ;.2. ongress passed the oinage ct of567) gold piece of grains,5>> percent Ane, a silver dollar of B65.


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4imetallism was intended to increase the supply of money,stabiliEe prices, and facilitate setting exchange rates.

2ome authors, such as ngela 0edish or harles *indleberger

have argued that bimetallism was, by construction, unstable.

hanges in goldCsilver exchange were, in their eyes, leadingto massive changes in the money supply.

4imetallism was thus inherently Fawed and the advent ofthe gold standard was inevitable


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!he practical diGculties of having two metals as money ledone nation after another to abandon the e-ort, and to adopta system of monometallism, using gold to back thecurrency.

!he historical development of coinage in modern nationshas been from silver monometallism through a more or lessunsatisfactory experience with bimetallism, to the singlegold standard. 2till, in the twentieth century, both metals

lost their former importance within monetary systems. How,monometallism in the form of the gold standard has beenabandoned by all nations.


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GOLD STANDARD


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gold standardis a monetary system in which the standardeconomic unit of account is based on a Axed Duantity of gold.

!hree types can be distinguished specie, exchange, and bullion.

In the gold specie standardthe monetary unit is associatedwith the value of circulating gold coins or the monetary unit hasthe value of a certain circulating gold coin.

The gold bullion standard is a system in which gold coins donot circulate, but the authorities agree to sell gold bullion ondemand at a Axed price in exchange for the circulatingcurrency.

Thegold exchange standard usually does not involve thecirculation of gold coins. !he main feature of the gold exchange

standard is that the government guarantees a Axed exchangerate to the currency of another country that uses a goldstandard (specie or bullion), regardless of what type of notes orcoins are used as a means of exchange.

Most nations abandoned the gold standard as the basis otheir !onetar"


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Origin

!he gold specie standard arose from the widespread acceptance ofgold as currency.

Iarious commodities have been used as money and the use ofgold as money began thousands of years ago in sia inor.

/n 5656, 2ir /saac Hewton, the master of the 0oyal int,established a new mint ratio between silver and gold that had thee-ect of driving silver out of circulation and putting 4ritain on agold standard.

formal gold specie standard was Arst established in 5J


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Three t"pes o Gold (urrenc"


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I!pact o )orld )ar I

4y the end of 575B, the classical gold standard was at its peakbut World War / caused many countries to suspend or abandonit.

/n Anancing the war and abandoning gold, many of the

belligerents su-ered drastic inFations.

1rice levels doubled in the ;2 and 4ritain and tripled in +rance.

;ltimately, the system could not deal Duickly enough with thelarge balance of payments deAcits and surpluses as the systemwas under the pressures of war and rapid technological change.

+or example, %ermany had gone o- the gold standard in 575,and could not e-ectively return to it because War reparations

had cost it much of its gold reserves.


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Gold *ullion replaces Gold

Specie as Standard!he gold specie standard ended in the ;nited *ingdom and

the rest of the 4ritish "mpire at the outbreak of World War /.

!reasury notes replaced the circulation of gold sovereigns

and gold half sovereigns.!he 4ritish %old 2tandard ct 57


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William c*inley (


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Great Depression

2ome economic historians, blame the gold standard of the57s for prolonging the economic depression which startedin 57


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Ad&antages

3ongCterm price stability

!he gold standard provides Axed international

exchange rates between participating countries andthus reduces uncertainty in international trade.

gold standard does not allow some types of Anancialrepression.

/t stands as a protector of property rights.


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Disad&antages!he uneDual distribution of gold deposits makes the gold standard

more advantageous for those countries that produce gold.2ome economists believe that the gold standard acts as a limit on

economic growth.

lthough the gold standard brings longCrun price stability, it ishistorically associated with high shortCrun price volatility.

eFation punishes debtors. 0eal debt burdens therefore rise,causing borrowers to cut spending to service their debts or todefault. 3enders become wealthier, but may choose to save someof the additional wealth, reducing %1.

!he money supply would essentially be determined by the rate of

gold production.evaluing a currency under a gold standard would generally

produce sharper changes than the smooth declines seen in Aatcurrencies, depending on the method of devaluation.

ost economists favour a low, positive rate of inFation of around


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THE BRETTON WOODS

SYSTEM


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The more the markets grow, the lesser the control. The

lesser the control, the greater is the yearning to controlit.


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&ne such control measure was undertaken in 57 when nations came together to bring back order in a chaotic Anancialworld.

!he gestation of the 4retton woods conference arose in the mindsof two men of di-erent temper and background but eDual brillianceand arrogance. !hey were the 4ritish economist+ohn Ma"nard,e"nesand -enr" Dexter )hiteof the ;2 treasury.

!he .nited Nations Monetar" And /inancial (onerence

better known as the *retton )oods (onerence, established acurrency regime and two powerful institutions, the InternationalMonetar" /undand the )orld *an0'


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Harry Dexter

White John Maynard

Keynes


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S"ste!fter World War / most countries wanted to return to the old Anancial securityand stable situation of preCwar times as soon as possible. iscussions about areturn to the gold standard began and by 57


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The (onerence4retton Woods refers to the internationalmonetary system adopted in :uly 57 thatestablished rules for rebuilding the postCwar

economic order.!he scenario discussed here is when World War isstill not over' despite of these 6B> delegates from llied nations attended the conference at theMount )ashington -otel in *retton )oods%N'-', to create a new monetary structure for theAnancial and commercial relations among theworldNs leading economies.

!he goal was to avoid a replay of the economicdisasters of the 57B>s.

:ohn aynard *eynes who stated 1 )e% thedelegates o this (onerence% Mr 2resident%ha&e been tr"ing to acco!plish so!ething&er" di3cult to acco!plish'4'''5 It has beenour tas0 to 6nd a co!!on !easure% a

co!!on standard% a co!!on ruleacceptable to each and not ir0so!e to an"'7


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The T8o ideas!he ideas of :ohn aynard *eynes and #arry exter White have beendescribed as very di-erent from each other on several occasions butin fact there are extraordinary similarities. ccording to the Whiteplan, a *an0 or Reconstruction 9toda" the )orld *an0:and an

International Stabilisation /undshould be established. !he*eynes plan called for the same.

!he only di-erence was that *eynes wanted to vest the /+ withpossibilities to create money and with the authority to take actions ona much larger scale. /n case of balance of payments imbalances :ohn

aynard *eynes recommended that both sides, debtors andcreditors, should change their policies. ountries with paymentsurpluses should increase their imports from the deAcit countries andthereby create a foreign trade eDuilibrium. #arry exter White, onthe other hand, saw an imbalance as a problem only of the deAcit

country. "conomists today agree that White was mistaken and *eynes


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#;g 'll othermembers had to deAne the value of their money according towhat was called the Opar value systemP in terms of ;.2. dollars

or gold.


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.SA

!he ;2 has been and still is the dominating power of the 4retton Woodssystem. fter World War // the ;nited 2tates was the country with the biggest

economic potential.!he ;.2. dollar was the currency with the most purchasing power and it wasthe only currency that was bac0ed b" gold'dditionally, all "uropean nations that had been involved in World War //were highly in debt and transferred large amounts of gold into the ;nited2tates, a fact that contributed to the supremacy of the ;2. !hus, the .'S'

dollar 8as strongl" appreciated in the rest of the world and thereforebecame the key currency of the 4retton Woods system.!he headDuarters of the two main institutions (the /+ and the World 4ank)are situated in Washington .. !he dominant role of the ;2 alreadybecame apparent when the merican ideas of the 4retton Woods systemgained more acceptance than those of %reat 4ritain. The plans o the*ritish econo!ist +ohn Ma"nard ,e"nes 8ere re@ected and the !odelo the A!erican econo!ist )hite 8as a&oured'2ome delegates grumbled that the ;nited 2tates was using its newsuperpower status to push its own interests $ like global free trade $ andthat it was slow to compromise. t one point, the 4ritish representative, the

economist :ohn aynard *eynes, wrote that the mericans 1plainl" intendto orce their o8n conceptions through% regardless o the rest o


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The I!plied *argainThe U.S.

becomes a global

hegemon due to

strength of the

dollar

USs allies ac!uiesce to thishegemonic system because it

benefits their o"n economies

U.S. allo"s allies#

use of the system

for their o"n benefitU.S. is able to act

unilaterally to

secure its o"n

interests

D l t t th * tt


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De&elop!ent at the *retton)oods

;nder the agreement at 4retton Woods, countries were tomaintain an exchange rate in which the values of theircurrencies could Fuctuate only within a narrow range arounda Axed value based on gold. %old8s value was set in terms ofthe ;.2. dollar. !wo organiEations were set up to help govern

the international monetary systemthe International Monetar" /undwhich would address

temporary imbalances of payments

the International *an0 or Reconstruction and

De&elop!ent, which is now the chief agency of the WorldBank%roup.


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2urpose o IM/

!o promote international monetary cooperation by establishing aglobal monitoring agency that supervises, consults, andcollaborates on monetary problems.

!o facilitate world trade expansion and thereby contributes to the

promotion and maintenance of high levels of employment and realincome.

!o ensures exchange rate stability to avoid competitive exchangedepreciation.

!o eliminates foreign exchange restrictions.

!o assist in creating systems of payment for multilateral trade.


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2urpose o I*RD !he World 4ank comprises of two institutions

the /nternational 4ank for 0econstruction andevelopment (/40), and the /nternational evelopmentssociation (/).

!o improve the living standards

!o eliminate the worst forms of poverty.!o support the restructuring process of economies.

!o provide capital for productive investments.

!o encourages foreign direct investment by making

guarantees or accepting partnerships with investors.!o keep payments in developing countries balanced and

fosters international trade. /t is active in more than 5>>developing economies.

!o o-er Anancial services, analytical, advisory, and capacity

building.


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(risis o the s"ste!

/n the 57K>s and 576>s enduring imbalances of payments betweenthe Western industrialised countries weakened the system of4retton Woods.

#owever, in the 57K>s they ran a very inFationary policy andlimited the convertibility of the ;.2. dollar because the reserveswere insuGcient to meet the demand for their currency. !he othermember countries were not willing to accept the high inFation ratesthat the par value system would have caused and Othe dollarended up being weak and unwanted, Qust as predicted byGresha!Bs la8 *ad !one" dri&es out good !one"'P

!he system of 4retton Woods collapsed.


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Rele&ance Toda"+or decades, the dollar has been the world8s most widely used currency.

any governments hold a large portion of their reserves in dollars. rudeoil and many commodities are priced in dollars. 4usiness deals aroundthe world are done in dollars. 4ut the Anancial crisis has highlighted howmerica8s economic problems can wreak havoc on nations around theworld.

!he 8orld 6nancial crisis, largely a result of excessive riskCtaking andfaulty risk management practices in the Anancial markets, hashighlighted the immediate need for comprehensive reforms to theexisting global economic and Anancial structure.

!he subCloan crisisin the ;nited 2tates led to the collapse of the worldeconomy and has brought an immeasurable loss to the entire world.

Restructuringthe anachronistic 4retton Woods system needs C reCexamining reserve currencies, dealing with growing public debt and thesymbiotic relationship of the state with Anance capital, regulating stock

markets, hedge funds, and banks to avoid future disasters.


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hou iaochuan, governor ofhina8s central bank, has proposed

creating as part of reform in theinternational monetary system.

O reate a currency made up of abasket of global currencies and

controlled by the /nternationalonetary +und. all for a globalcurrenc"to replace the dominantdollar.P


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Su!!ar" /n :uly of 57, as World War // is coming to an end, all allied

countries meet in 4retton Woods, Hew #ampshire for the purpose

of establishing a new international monetary system.t 4retton Woods, countries agree that Axed exchange rates were

necessary for OrestartingP world trade and global investment (bothof which had fallen dramatically).

/t is also obvious that the ;2 dollar would become the cornerstoneof any new international monetary system.

*ey points of the 4retton Woods were 1egging the ;.2. dollar to gold at =B@ per ounce (with the ;2 the only

currency convertible into gold).ll other countries peg their currencies to the ;.2. dollar.!heir par values are set in relation to the ;.2. dollar %41 R =' :1S R BK> (5in 577)

ountries agreed to OsupportP their exchange rates within T or L5M of these par values.!his is done through the buying or selling of foreign exchange

when market forces needed to be o-set. /nternational onetary +und and the /nternational 4ank for

0econstruction and evelopment were set up.


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2OST *RETTON

)OODS SYSTEM

Th S d f B tt


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The Seeds of BrettonWoods Demise /n the 57K>s, 4retton Woods begins to unravel.1resident 3yndon :ohnson tries to Anance both his O%reat

2ocietyP programs at home and the merican war inIietnam.

!his produces a large ;2 +ederal budget deAcit, which,coupled with easy monetary policy, results in #igh inFation in the ;nited 2tates and n increase in ;.2. spending for cheaper imports

s a result, the ;nited 2tates balance of payments movesfrom a surplus into a deAcit.ollar is seen by the market as Oovervalued.P

+oreigners become concerned about holding overvalued;.2. dollars at a rate of =B@ an ounce. arkets are suggesting it should take more than =B@ to

buy 5 oE of gold.


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U.S. Balance of Payments: 1965 -4y the midC57K>, the ;.2. balance of payment (e.g., trade

balance) started to deteriorate (a declining surplus).4y 5765, the ;.2. merchandise trade balance moved intodeAcit.


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The ast !ears of Bretton

Woods: 19"# -19"$4y 576>, Anancial markets are reluctant to hold the OovervaluedP

;.2. dollar.arkets sell ;2 on foreign exchange markets.!his puts downward pressure on the exchange rate for dollars. nd upward pressure on the exchange rate for foreign

currencies.entral banks engage in massive intervention in an attempt to

hold their 4retton Woods par values.

entral banks buy ;.2. dollars as they are sold in markets.s a result, foreign holdings of dollars increase dramatically andeventually exceed ;.2. gold holdings.4y 5765, gold coverage for ;.2. dollars had dropped to


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Smithsonian %&reements'

Decem(er 19"1 /n ecember 5765, ten maQor counties meet in Washington,

.. with the aim of restoring stability to the internationalmonetary system.

eeting concludes with the 2mithsonian greements, whereby

*ey countries agree to revalue their currencies and in

essence set new par values against the ;2 dollar (e.g., yenT56M, mark T5B.@M, pound and franc T7M)

!he ;.2. also agrees to raise the dollar price of gold from

=B@ to =BJ an ounce (represents a further devaluation of thedollar).

/t was also agreed that currencies could now Fuctuate T or L


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The )inal *olla+se of the Dollar'

)e(r,ary 19"$5B months after the 2mithsonian greements, the dollarcomes under renewed attack for being overvalued.

/n +ebruary 576B, markets sell o- dollars again.

s before, central banks intervene and buy dollars.

&n +ebruary, 5 per ounce.

:apan and /taly Anally let their currencies OFoatP on

+ebruary 5Bth.+rance and %ermany continue to manage their currencies

in relation to the dollar.

/n response to mounting speculative currency Fows,foreign exchange markets are closed on arch 5, 576B,

and reopen on arch 57, 576B.


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The nd of Bretton Woods

&n arch, 57, 576B, when foreign exchange marketsreopen, maQor countries announce that they areOFoatingP their currencies

&n arch 57, 576B, the list of countries Foating their

currencies includes :apan, anada, and those inWestern "urope.

!he 4retton Woods Axed exchange rate system e-ectivelyends on this date.

pproximately B months later, by :une 576B, the dollar

has OFoatedP down an average of 5>M against the maQorcurrencies of the world.


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!he Sen uring 4retton Woods

=>F'#

=>F'

=>F'H

=>F';

=H$

=H$'#

=H$'

=H$'H

=H$';=H

=H'#

=H'

+2Y Exchange Rate F>$ C FJ$

Exchange Rate


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2terling uring 4retton Woods

#'

#'#

#'=

#'

#'>

#'H

#'J

#';

#'F

G*2 Exchange Rate F>$ C FJ$

Exchange Rate


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Sen /mmediately fter the ollapse

of 4retton WoodsFJ C F;$ Annual Data K in .SD

$

>$

I$$

I>$

#$$

#>$

=$$

=>$

G$$

Exchange Rate

5765 B7.BB CB.56 C5B..BJM

576 M

576@ JM

5766


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2terling /mmediately fter the

ollapse of 4retton WoodsFJ C F;$ Annual Data K in G*2

$

$'>

'>

#

#'>

=

Exchange Rate

5765


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!he Sen fter 4retton

Woods


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2terling fter 4retton

Woods


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"xchange 0ate 0egimes !oday

urrently, current exchange rate regimes fall along aspectrum as represented by national governmentinvolvement in a-ecting (managing) their currencyNsexchange rate.

Iery 3ittle (if any)/nvolvement

ctive/nvolvement

+orex arket isetermining

"xchange rate

%overnment isanaging or

1egging"xchange rate

ere are e o ay n


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ere are e o ay nTerms of /chan&e 0ate

0e&imesOixedP /nternational onetary 2ystem consisting of+loating exchange rate regimes

arket forces determine the relative value of a currency.anaged (dirty Foat) rate regimes %overnments managing their currencyNs value with

regard to a reference currency. arket moves these currencies, but governments are

managing the process and intervening when necessary.1egged exchange rate regimes %overnment Axes (links) the value of its currency relative

to a reference currency. +ewer of these regimes than in the past.


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Post Bretton Woods S,mmary

2ince arch 576B, the maQor currencies of the world haveoperated under a Foating exchange rate system.

While central banks of these maQor countries haveoccasionally interviewed in support of their currencies, thisintervention has become less over the years.!he ;2 last intervened in 577J.

/n addition to the maQor currencies of the world, a growingnumber of other developing country currencies have alsomoved to a Foating rate system.

!hus more and more, market forces are driving currencyvalues.

!he post 4retton WoodsN period has resulted exchange ratesbecome much more volatile and , perhaps, less predictablethen they were during previous Axed exchange rate eras.

!his currency volatility complicates the management oflobal com anies.


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+reely +loating urrencies by

ountry or 0egion, /+ data, >Klbania

ongo, em. 0ep. of/ndonesia;ganda

ustralia4raEilanadahile/celand

/srael*oreaexicoHew Uealand

Horway1hilippines1oland2outh frica

2weden!urkey;nited *ingdom

!anEania

:apan2omalia2witEerland;nited 2tates

"uroEone


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4ibliography888'google'co'in888'googlei!age'co'in

888'britannicaenc"lcopedia'co!

3ink to the history of foreign exchange regime changes ofmany countries.

intl'econ'cuh0'edu'h0exchange rate regi!e

Vuarterly report on ;.2. /ntervention in foreign exchangemarkets

888'n"'rb'org!ar0etsoreignex


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