Global Scenario of Exchange Rate Arrangements

Firms engaged in international business must have an idea about the exchange rate arrangement prevailing in different countries as this will facilitate their financial decisions. In this context, it can be said that over a couple of decades, the choice of the member countries has been found shifting from one form of exchange rate arrangement to the other, but, on the whole, preference for the floating rate regime is quite evident. At present as many as 35 of a total of 187 countries have an independent float, while the other 51 countries have managed floating system. The other 7 countries have a crawling peg, while 53 countries have pegs of different kinds. The EMU and other 20 countries of Africa and the Caribbean region come under some kind of economic and monetary integration scheme in which they have a common currency. Lastly, nine countries do not have their own currency as legal tender. The recent developments in the field of international monetary environment are worth mentioning. They are launch of Euro as the single currency for 11 of European countries and the currency crises in emerging markets. They are briefly mentioned below:

a) The Launch of Euro: On January 1, 1999, 11 member states of the EU initiated the European Monetary Union. They established a single currency, the Euro, which replaced the individual currencies of the participating member states. On December 31, 1998, the final fixed rates between the 11 participating currencies and the Euro were put into place. On January 4, 1999, the Euro was officially traded. The 15 members of the European Union are also members of the European Monetary System. According to the EU, EMU is a single currency area, now known informally as the Euro Zone, within the EU single market in which people, goods, services and capital move without restrictions. In December 1991, the members of the European Union met at Maastricht, the Netherlands and concluded a treaty that changed Europe‘s currency future. The Maastricht Treaty specified a timetable and a plan to replace all individual currencies with a single currency, now called the Euro. Other steps were adopted that would lead to a full European Economic and Monetary Union. The growth of global markets and the increasing competitiveness of the Americas and Asia drove the members of the EU in the 1980s and 1990s to take actions that would allow their residents and their firms to compete globally. The reduction of barriers across all members countries to allow economies of scale (size and cost per unit) and scope (horizontal and vertical integration) was thought to be Europe‘s only hope of not being left behind in the new millennium. The successful implementation of a single, strong, and dependable currency for the conduct of life could well alter the traditional dominance of the U.S. dollar as the world‘s currency.

b) Emerging Market Crises: After a number of years of relative global economic tranquility, the second half of the 1990s was racked by a series of currency crises that shook all emerging markets. The devaluation of the Mexican peso in December 1994 served as a harbinger of crises to come. The Asian crisis of July 1997, the Russian ruble‘s collapse in August 1998, and more recently the fall of the Brazilian real in January 1999 provide a spectrum of emerging market economic failures, each with its own complex causes and unknown outlooks. These crises also illustrate the growing problem of capital flight and short-run international speculation in currency and securities markets.

  • The Asian crisis of 1997: The roots of the Asian currency crisis extended from a fundamental change in the economics of the region, the transition of many Asian nations from net exporters to net importers. The most visible roots of the crisis were in the excesses of capital flows into Thailand in 1996 and early 1997. As the investment ―bubble‖ expanded, some participants raised questions about the economy‘s ability to repay the rising debt. The bath came under sudden and severe pressure. The Asian crisis – for it was more than just a currency collapse- had many roots besides the traditional balance-of-payments difficulties. The complex structures combining government , society, and business throughout the Far East provide a backdrop for understanding the tenuous linkage between business, government, and society.
  • The Russian crisis of 1998: The loss of the relatively stable ruble, once considered the cornerstone and symbol of success of President Boris Yeltsin‘s regime, was a potential death blow to the current Russian government and economic system. If nothing else, Russian borrowers may find themselves persona non grata for years to come in the international capital markets.
  • The Brazilian crisis of 1999: Potentially the mildest of the three currency collapses, the Brazilian real‘s fall in January 1999 was the result of a long expected correction in an ill-conceived currency policy. Because so many major Brazilian firms are publicly traded, this crisis serves as an excellent example of how equity markets revalue firms that are exposed to currency devaluations and vice versa.