Chaos In The Currency Markets : Currency Crisis Of The EMS

Chaos in The Currency Markets : Currency Crisis of The EMS


1. What does the crisis of September 1992 tell you about the relative abilities

of currency markets and national governments to influence exchange rates?


     The currency markets and national governments both have abilities to

influence exchange rates. Like other financial markets, foreign exchange markets

react to any news that may have a future effect. Speculators are the part of the

currency markets that take currency positions based on anticipated interest rate

movements in various countries. Day-to-day speculation on future exchange rate

movements is commonly driven by signals of future interest rate movements. By

using the signal, speculators usually take the position before the things

actually occurred. Sometime, if high power enough, the speculators position can

influence the exchange rate movement. The government controls is one of the

factors affecting exchange rate. The government can influence the equilibrium

exchange rate in many way, including direct intervening (buying and selling

currencies) in the foreign exchange markets and indirect intervening by

affecting macro variables such as interest rates.


2. What does the crisis of September 1992 tell you about the weakness of fixed

exchange rate regimes?


     From European currency crisis of September 1992, it shows us that there

are weakness of the fixed exchange rate system. When exchange rate are tied, a

high interest rate in one country has a strong influence on interest rates in

the other countries. Funds will flow to the country with a more attractive

interest rate, which reduces the supply of fund in the other countries and

places upward pressure on their interest rates. The flow of fund would continue

until the interest rate differential has been eliminated or reduced. This

process would not necessarily apply to countries outside ERM that do not in the

fixed exchange rate system, because the exchange rate risk may discourage the

flow of funds to the countries with relatively high interest rate. However,

since the ERM requires central banks to maintain the exchange rates between

currencies within specified boundaries, investors moving funds among the

participating European countries are less concerned about exchange rate risk.


3. Assess the impact of the events of September 1992 on the EU 's ability to

establish a common currency by 1999.


     A major concern of a common currency is based on the concept of a single

European monetary policy. Each country's government may prefer to implement its

own monetary policy. It would have to adapt to a system in which
This is ONLY a preview of the article. If you would like to view the entire document, you must subscribe to Academic Library. Please register below now!









Subscribe to Academic Library
When you subscribe to the Academic Library, you get 24-hour access to the online database containing full-text articles written by thousands of scholarly students. For only $8.95 per month, you receive unlimited monthly access to view and download all of our 40,000 articles available online. That is less than the price of one textbook!
This price includes:

24-hours-a-day, 7 days a week unlimited access on any computer with Internet access
Complete access to all 40,000 articles, essays, and research papers
Ability to view and download virtually unlimited number of documents
Ability to browse through perfectly arranged catalog of articles
Superior search and relevancy ranking techniques using Google SiteSearch and our local search engine
Instant access to the online database after registration


You can pay by credit card, checking account. You get instant access after registration:


You will be billed $ 8.95 every 30 days (recurring billing) starting on the day you subscribe.

Your credit card will automatically be renewed for your convenience until you cancel.




If you are already registered, please click here to login.