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Dollar Devaluation

Currency takes on a life of its own in the international trading markets. Aside from the value that governments place on their currency, international traders place value that ultimately determines how much any given currency can buy. In recent months, there has been increased attention given to the volatility of the world's currencies, with particular attention given to the American dollar, the Japanese yen, the Deutchemark, and the Mexican peso. This research examines the recent devaluation of the American dollar, the recent performance of the British pound and potential ramifications on the American and world economies.

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 such devaluations occur. However, it should be noted that the traders in the currency market are not only professional investors and managers of investment funds; entire governments invest in other government's currencies, with the result that poor investments can be substantially negative.

There are steps that countries can take to shore up their currencies. For example, in 1993, Europe permitted its Exchange Rate Mechanism to collapse, which permitted th...

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Dollar Devaluation. (1969, December 31). In LotsofEssays.com. Retrieved 15:31, March 28, 2024, from https://www.lotsofessays.com/viewpaper/1693872.html