Date of Award

5-1989

Document Type

Senior Project

Degree Name

Bachelor of Arts (BA)

Abstract

Intervention in the foreign-exchange markets by the central banks of the major industrial nations has been the norm for a little over 40 years. The level of intervention exercised by these central banks during these 40 years has ranged from very heavy to very light. At one extreme was the Bretton Woods period which was characterized by extensive, cooperative intervention among central banks to maintain fixed exchange rates between currencies. At the other extreme were periods like the early to mid-1970's and the early to mid-1980's which were characterized by the use of only occasional intervention. The most recent round of extensive interventions took place from 1985 through early 1988. These recent interventions represented a concerted effort by the United States, Great Britain, West Germany, France, and Japan (the G-5) to force the U.S. dollar down more rapidly than the foreign-exchange market was driving it down. Subsequently, the dollar's fall required further interventions by the G-5 to maintain the dollar in a certain target zone. The entire effort by the G-5 was initiated to aid the United States in correcting its massive trade deficit. This effort was unsuccessful in reaching its goal. While the United States' trade deficit with the other countries of the G-5 and the countries of the European Economic Community did improve, the U.S. trade deficit with many of the countries whose currencies were tied to the U.S. dollar did not improve. The United States continued to run a massive trade deficit. Despite this huge trade deficit, the dollar began to rise again on the foreign-exchange markets in the spring of 1989. A currency, such as the U.S. dollar, which rises in value when the country is experiencing a huge trade deficit is not following the 11 rules 11 of the basic monetary systems. Possible reasons for the dollar's ability to break the 11 rules 11 include that the U.S. dollar is a reserve currency for the rest of the world and that the United States is a profitable and safe place to invest. The existence of these reasons and the unlikelihood that they will be removed indicate that intervention on behalf of the U.S. dollar will not be very effective. vii

Share

COinS