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Transcript
International Finance
Overview
Bill Reese
1
Learning Objectives

In this unit we will learn:





2
The history of XRs in the U.S.
The different types of XR regimes
What the Federal Reserve is
What the Euro is
How the FX market operates
Gold Standard


1876 – 1913
Values of currency set against precious
metals


3
Each country set own conversion rate
Must maintain adequate reserves (Fort Knox) for
redemption
Gold Standard


Gold standard implied fixed XR
Limited growth of money supply for any
country


4
Need enough gold
WWI limited free movement of gold
1920s and 1930s




Some countries reverted to gold standard
Some abandoned
Some pegged to dollar or pound
Period of instability

5
International trade declined
Bretton Woods Agreement


International agreement in 1944
Fixed exchange rates




6
All currencies pegged to dollar
Dollar set at $35/ounce of gold
Intervention to prevent fluctuation of > 1%
Lasted until 1973
Floating Exchange Rates



By 1971, dollar had depreciated
Concerns about U.S. ability to convert dollars
to gold
March 1973


7
U.S. allows dollar to float
Other major currencies float as well
Countries with Floating XRs
8
Countries with Pegged XRs
9
Floating Exchange Rates


Determined by supply and demand
Factors affecting demand




10
Demand for nation’s product
Demand for nation’s stocks and bonds
Inflation expectations
Government stability
Floating Exchange Rates




11
Supply is determined by monetary policy of
central bank
U.S. central bank is the Federal Reserve
Too much supply – inflation
Not enough supply - recession
Federal Reserve

U.S. Central Bank


12
Established in 1913
12 federal reserve banks
Federal Reserve

Board of Governors
•
Seven members



13
Appointed by President and confirmed by congress
14-year term
Chairman’s term is four years
Federal Reserve

FOMC

Chief policymaking committee



All 7 governors
President of NY fed bank
Four other fed presidents
–

All votes are equal

14
All fed presidents attend meetings
Chairman has much influence
Federal Reserve

FOMC determines monetary policy

Supply of money



15
Purchase or sell Treasuries
Influences short-term rates
Impacts XR
Federal Reserve

Mission




Goals may conflict

16
Maximum employment
Stable prices
Moderate long-term interest rates
XR is not explicit goal
Euro

Launched Jan. 4, 1999
•
11 members

•
17
Belgium, Germany, Spain, France, Ireland, Italy,
Luxembourg, Netherlands, Austria, Portugal, Finland
Greece added one year later
Euro

Requirements for entry


18
Nominal inflation < 1.5% above average for three
members with lowest inflation rates during
previous year
Long-term rates < 2% above average for three
members with lowest interest rates
Euro

Requirements for entry
Fiscal
deficit < 3% of GDP
Government debt < 60% of
GDP
19
Euro

Advantages



20
Lower transaction costs
Less XR risk
Greater price transparency and price-based
competition
Foreign Exchange Market



Spans the globe
Operates 24 hours/day
Major exchanges

21
Singapore, Hong Kong, Tokyo, Bahrain, London,
New York, San Francisco, Sydney
Foreign Exchange Market
25,000
20,000
15,000
10,000
5,000
0
1
2
3
4
5
6
10 AM
Lunch Europe
In Tokyo In Tokyo opening
22
7
8
9
Asia
closing
10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Americas London
open
closing
Afternoon
in America
6 pm Tokyo
In NY opens