Best Times of the Twentieth Century

Home (Main Menu)


By EILEEN GLANTON, The Associated Press, 01/19/99

"NEW YORK (AP) -- From the debut of the euro to the devaluation of the Brazilian real, foreign currencies are at center stage of business developments. Here is an explanation of some foreign exchange terms:

Exchange rate -- The price of one currency in terms of another. Monday, one French franc was worth 17.69 cents. Expressed another way, one dollar was worth 5.6529 French francs.

Exchange rates fluctuate as currency traders and investors change their perceptions of world events and the stability of each nation's economy and government. Most countries try to maintain somewhat stable rates because this makes investors feel more secure. One way to ensure that stability is to link the currency to a specific amount of a commodity, like silver or gold, and keep a reserve of that commodity equal to the total value of the currency in circulation. Some nations link their currency to the dollar because it is perceived as stable.

A linked system is considered "fixed," while a system that relies on market forces is considered "floating." Many strong economies, including the United States, float their currency. Many weaker economies fix their currency, hoping to lock in some security.

Peg -- A tie to a currency or a fixed exchange rate, usually established by government intervention. For more than a decade, Hong Kong has pegged its currency at the rate of 7.8 Hong Kong dollars to one U.S. dollar.

Band -- A range within which a currency can trade. Some governments fix an exchange rate but allow their currency to trade perhaps 5 percent above or below that rate before intervening by buying or selling currency.

Devaluation -- A decline in the value of a currency as a direct result of government policy. A currency that falls due to market forces has depreciated; a currency that falls because the government has removed controls on it has been devalued.

In the past few years, Thailand's baht, Vietnam's dong and Russia's ruble have all been devalued. Last week, Brazil joined the list.

Brazil had been defending the real's value by keeping interest rates high and by buying the real on currency markets. But that became too costly, and Brazil eventually bet that by letting its currency devalue, it will be able to bring interest rates lower and will spend less money propping up the real. That may stimulate business and help Brazil out of a recession.

One means of devaluing a currency is to expand its trading band.

Float -- Removing currency controls like pegs or bands and allowing market forces to determine a currency's value. Market forces could include inflation, stock market rallies or tumbles, political changes, trade conflicts.

Central bank -- In most nations, the central bank is a government body that issues currency and sets interest rates in an effort to control the level of economic activity. In the United States, the Federal Reserve System fulfills this role.

Currency board -- An alternative to a central bank, often established in response to economic turmoil. A currency board, which generally includes some foreigners, replaces the central bank and sets a fixed exchange rate.

Argentina instituted a currency board in April 1991, creating a new peso worth $1 and requiring the government to hold enough dollars in reserves so that every peso could be exchanged for a dollar. The move drastically cut inflation and also restored Argentina's ability to borrow money at reasonable interest rates. Some economists have begun suggesting that Brazil follow a similar model.

However, currency boards effectively strip a nation of the power to control its own economy. Economic factors such as wages, interest rates, the balance of payments, even rents, adjust to the fixed exchange rate."


Top -- Home -- Best Times