Dollar Devaluation

The Japanese yen, German mark and American dollar are generally considered the world's strongest currencies (Petruno, 1995, p. D3). Merchants and governments expect these currencies to remain relatively stable, and often conduct business using these currencies rather than their own (this was a particularly common practice in the former Soviet Union, where the ruble was often not accepted for international transactions). Investors count on these currencies to provide a "safe haven" when other currencies fluctuate wildly, providing the traders with strong options for placing funds.

When traders move from one currency to another, the currency being sold is devalued. These devaluations can be devastating for investors still holding this currency, with the result that traders typically try to exit particularly volatile and vulnerable currencies before su

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he British pound has suffered devaluation over the last several years, as well. Where the United States has increased interest rates, mainly to keep its own recovery from getting out of hand, but also to shore up the dollar, Britain has chosen to let its currency fall on the world market. In early 1994, the British reduced interest rates by 0.25 points, in part because the inflation rate in the United Kingdom was running lower than the government expected. However, the result was that the pound fell against both the mark and the dollar, further weakening the nation's long-term prospects. The United Kingdom is committed to keeping inflation rates low rather than in keeping its currency strong (Gorman, 1994, p. 2A). Overall, analysts expect that the British pound will continue to fall against major world currencies as the nation seeks to maintain a healthy domestic economy. This represents a long-term view of the currency market, since a health economy will eventually attract investors back to the pound. However, there is some doubt as to how long the pound will be permitted to fall, and also as to the relative strength of other currencies, such as the yen and the mark ("Cross Up," 1994, p. 20). Until World War II, the pound
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Approximate Word count = 1667
Approximate Pages = 7 (250 words per page)

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