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Federal Reserve & Stength of the Dollar

The purpose of this research is to review the role of the Federal Reserve in the recent strength of the dollar in international currency exchange. For purposes of this research, the dollar's currency exchange value against the Japanese yen and against a tradeweighted basket of currencies will be used for comparisons.

RECENT MOVEMENTS IN THE VALUE OF THE DOLLAR

On 5 December 1989, the value of the dollar against the yen closed at Y143.80:$1 ("Markets Diary," 1989). This rate compared to a high over the past 12 months of Y149.46:$1, and a 12 month low of Y121.92:$1. The Federal Reserve has recently moved gradually to relax shortterm interest rates (Randall, 1989). The prime motive of the Federal Reserve action is to provide moderate stimulation to a softening economy. The action, however, also tends to weaken international demand for the dollar, which, in turn, leads to a decline in the international currency exchange value of the dollar.

EXPLAINING THE CHANGING VALUE OF THE DOLLAR

In the early1970s, as a consequence of the declining value of the dollar in international currency exchange markets,

1 2and a continuing and increasing drain on the country's monetary gold supply, President Nixon devalued the dollar, which, in turn, increased the conversion value of gold. When this actionfailed to either stop the fall in the value of the dollar, or the drain on the country's gold stock, the president established a twotiered gold price system, under which the United States would exchange gold for dollars at a higher price for central banks than would apply to similar transactions involving private traders. When neither of these tactics proved successful, the United States and the other major western industrial countries agreed to abandon the existing fixedrate currency exchange system, and to allow their currencies to float, or seek their own exchange rates, on the international currency exchange markets.

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Federal Reserve & Stength of the Dollar. (1969, December 31). In LotsofEssays.com. Retrieved 06:07, March 28, 2024, from https://www.lotsofessays.com/viewpaper/1683988.html