The History Of Exchange Rates Practices
Exchange rates history outlines three main types of exchange rates involved in the determination of international currency values. The most common kind of exchange rate is the floating exchange rate, which is the opposite of a fixed exchange rate. Under a floating exchange rate, the value of a currency fluctuates according to the foreign exchange market. This floating value has been preferred during exchange rates history because it allows for the possibility of adjusting currency values if the foreign exchange market it fluctuates with experiences a crisis.
In an economic crisis in which foreign currency values begin to drastically fluctuate due to a major increase or decrease in the currency's value, central banks will usually implement a floating exchange rate in a practice known as a managed float. A managed float involves the investment or selling off of large amounts of currency by central banks. The central banks will invest or sell depending upon the nature of the crisis in order to stabilize the exchange rate.
Another type of exchange rate is known as a pegged float. In a pegged float the currency in question is pegged to another value, such as a foreign currency or even gold, to a central, fixed rate. This fixed rate is reevaluated and adjusted from time to time. The third kind of exchange rate is a fixed rate, or a pegged rate. In a fixed rate system of exchange, currency is converted to another on a one-to-one basis. Currencies that have a fixed exchange rate are maintained by foreign reserves, which match the currency's value. One of the most important examples within exchange rates history of a fixed rate is the Bretton Woods Agreement. This agreement pegged the currencies of Western Europe to the U.S. dollar and maintained this fixed exchange rate with Europe for more than 25 years.
Exchange rates history shows this fixed exchange system was implemented as a way to stabilize Europe's economy after World War II. It has frequently been argued throughout exchange rates history that examples such as the Bretton Woods Agreement point to a preference for fixed exchange rate system. In more recent exchange rates history, the improvement of the financial crisis in Asia during the late 90's has been attributed to the institution of a set exchange rates between the U.S. dollar and Chinese and Malaysian currencies. However, there are those who argue that the floating exchange rate is the preferred method of currency exchange because it allows for flexibility in times of economic crises and fluctuating foreign business cycles. In a fixed exchange rate system, the values of currency are at the mercy of foreign reserves and will go into crisis if foreign reserves drop due to the one-to-one correlation between the currency and the foreign reserve. Should an economic crisis take place within a floating rate system, this drop in foreign reserves would have less of an effect on the value of currency as the value is not directly related to the foreign reserve. Also, in a fixed exchange rate system the central banks can implement a manage float to stabilize the currency.
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