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Untitled Document
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United States |
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The Federal Reserve System regulates domestic money and credit policy, oversees foreign lending, is in direct contact with other Central Banks, and has a major influence on all questions of currency policy. The Federal Reserve Bank of New York, as an agent for the U.S. Treasury, administers the Exchange Stabilization Fund and Treasury, administers the Exchange Stabilization Fund and also operates in spot futures markets of leading foreign currencies.
The U.S. Dollar was labeled "the most unstable" of currencies, as it precipitated the currency debacles of May and August 1971.
The devaluation of the U.S. Dollar began on December 18, 1971 through early 1972 and culminated in the global collapse of and heightened capital flight from the American unit, induced by the official burial of the two-tier gold market in November and the quadrupling of oil prices in 1973. Eventually, in April 1978, the par value of the U.S. Dollar in terms of gold and SDRs was repealed and the Greenback became a floating Effective Rate.
The Greenback subsequently found strength in most exchange centers because of high interest rates, lower inflation and foreign capital flowed into the United States.
During 1986 and early 1987, America's unit was again battered in major exchange centers as Washington and the Group of Seven felt that a weak U.S. Dollar was the best course for world monetary peace. However, the free markets seemed to think otherwise, constantly pushing the Greenback up in 1988, 1989 and 1990, despite official efforts to keep it weak at a cost of billions of U.S. dollars to the Federal Reserve.
Even though having been beaten down on New Year's Day of 1990 by heavy selling of Greenbacks by the Central Banks of Germany, Japan and the United States, the U.S. Dollar took on 13 Central Banks as dealers marveled at the unit's ability to withstand the onslaught until traders and speculators decided to take profits. In the three months to April 30th, the Fed and Treasury sold US$1.78 billion for Yen and Deutsche Mark, double the previous quarter, to slow the Greenback's rise. Nevertheless, it continued through May, despite an increase in Japanese interest rates.
Protracted indecision in Washington over the fiscal 1991 budget, expected lower interest rates and the weakened economy pushed the U.S. Dollar to new record lows against the Deutsche Mark while also falling against most other major currencies.
Then, in 1991, the U.S. Dollar fell to new lows against the Deutsche Mark as traders saw signs of discord among the Group of 7. Billions of Greenbacks were bought by the Fed and major Central Banks to prop the U.S. Dollar.
The dollar value against major currencies such as the Japanese yen, the euro and the German mark, came gradually as the U.S. economy boomed in the 1990s. According to many economists, that appreciation was mainly a by-product of global confidence in the U.S. economy.
Since 1995, the U.S. dollar has increased almost 70 percent in value against the mark. In 1995, 10,000 Japanese yen would have exchanged for about $107, but in 2001 the same amount of yen can exchange for only about $82 -- a close to 30 percent decline of the yen against the greenback.
Now, in the mid-year of 2002, the big story is, contrarily, the weakening US dollar. Between geopolitical instability in South Asia and the Middle East, the relatively-subdued US economic recovery, and the accounting uncertainties plaguing the world's most important economy, the slide in the greenback is not surprising. However, there are something more. Foreign demand for US assets has dropped precipitously, all signs point to US interest rates remaining low through the end of this year, and there seems little reason for foreigners to want to own any more of the US's assets than they already do.
Major sources of reference include:
1) World Currency Yearbook (WCY)
2) IMF Annual Report on Exchange Arrangement and Exchange Restriction (IMF)
3) FXHistory: historical currency exchange rates
4) Global economy shifts to new reality - Sustained Dollar weakness
5) Strong Dollar Hurts Dayton-area Exporters
6) 2001 World Development Indicators CD-ROM |
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Date
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Changes
to the exchange rate regime
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Real Effective Exchange Rate (1995 = 100)
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| 31 January 1934 | The United States Dollar (US$) was devalued as its gold content was reduced 40.94%, leaving the U.S. Dollar price of gold raising from US$20.67 to US$35.00 per fine ounce. (WCY 1984, p. 790) | | | 15 August 1971 | The formal convertibility of the U.S. Dollar into gold was suspended. This results in de facto devaluation and floating of the Dollar. (WCY 1984, p.790) | | | 18 December 1971 | The gold content of the Dollar was reduced 7.89%, increasing the gold price 8.57% to US$38.00 per fine ounce. (WCY 1984, p. 790) | | | 13 February 1973 | The Dollar devalued, with its gold content being cut 10%. The gold price rose 11.1% to US$42.22 per fine ounce. (WCY 1984, p. 790) | | | 1975 | | 117.620 | | 1976 | | 120.630 | | 1977 | | 118.570 | | 1978 | | 128.160 | | 1 April 1978 | The par value of the Dollar in terms of gold and SDRs was repealed when the Second Amendment to the IMF's Articles of Agreement entered into force, based on U.S. Public Law 94-564. An Effective Rate for the Dollar came into existence for all transactions. No margins are maintained, the rate determined by supply and demand. However, authorities can intervene when deemed necessary. There are no minimum reserve requirements of gold and foreign exchange for the national currency. (WCY 84, p.703) | | | 1979 | | 128.690 | | 1 November 1979 | The Treasury Department and the Federal Reserve announced a package of measures to strengthen the Dollar. There would be increased intervention in the foreign exchange markets, in cooperation with the central banks of the Federal Republic of Germany, Japan, and Switzerland. (IMF 1979, p.435) | | | 1980 | | 104.920 | | 1981 | | 115.440 | | 1982 | | 129.180 | | 1983 | | 135.250 | | 1984 | | 143.520 | | 1985 | | 148.570 | | 1986 | | 124.840 | | 1987 | | 112.380 | | 1988 | | 105.900 | | 1989 | | 109.340 | | 1990 | | 104.690 | | 1 January 1990 | U.S. banks were allowed to accept Foreign Currency Deposit Accounts. (WCY 90/93, p. 368) | | | 1991 | | 103.530 | | 1992 | | 101.270 | | 1993 | | 104.720 | | 1994 | | 103.420 | | 1995 | | 100.000 | | 1996 | | 104.310 | | 1997 | | 112.060 | | 1998 | | 120.040 | | 1999 | | 119.360 |
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