The transition to a floating exchange rate.

exchange rate is called the relative value of the currencies of the two states.In other words, the value of one currency expressed in terms of another.

modes setting exchange rates

worth familiarize with existing modes of setting exchange rates:

• On the basis of gold parities.The currencies that are tied to gold at a fixed rate related.Previously, the gold standard was the world market regulator automatic type.

• fixed rate.The central bank determines the rate of the national currency.This applies mainly to the limits of free fluctuations of the national currency, which is done for the purpose of macroeconomic stabilization.To this end, the Central Bank purchases or sells a particular amount of foreign currency.

• Floating exchange rate.It is determined as a result of unlimited fluctuations of supply and demand.In this case, the exchange rate will be the equilibrium price of the currency in the foreign exchange market.This rate fluctuations, the volume of imports and exports of payments and trade balance are not restricted.

If the first two modes for clear understanding of the floating exchange rate should be studied in more detail.

What is a flexible exchange rate?

floating or flexible exchange rate is a regime in which market exchange rates are subject to change depending on supply and demand.In the context of the free oscillations may rise or fall.It also depends on the carrying out of speculative operations on the market and the state's balance of payments.

theory regime of freely floating exchange rates should be the reason for the establishment of the equilibrium exchange rate.In this case, the country will have sufficient capacity to regulate economic condition in the absence of external influences.But in fact, flexible courses are the cause of unsustainable and destabilizing trends.The situation may be exacerbated by the influx of speculative funds.

Conclusion investment and trade agreements may be more difficult if the partners are not sure of making a profit.For this reason, countries preferred to adjust the exchange rates with the intervention.But quite often it turns into manipulation of exchange rates for competitive advantages in trade with other countries.

Creating a system of floating exchange rate

In 1976, a meeting of the interim committee of the IMF, which was reached Jamaica agreement.This procedure enshrined demonetization of gold and the transition to floating exchange rates.The Russian Federation was established by the decree of the appropriate mode from the November 15, 1991.The system of floating exchange rates was influenced by supply and demand, available on the foreign exchange markets of the state.

in commercial transactions to cover the foreign exchange risk began to use forward contracts.This method has gained popularity at the end of the 60s.It is a time marked by the transition to a floating regime, the crisis of the Bretton Woods system, as well as the instability of the currency markets.

reasons for creating a new system

Due to the instability of foreign exchange markets in 1964, it was announced the convertibility of Japanese and other world currencies.Thus, the US has lost the ability to maintain the price of an ounce of gold.The state faced with soaring inflation.Of course, the US government has taken a number of measures to combat this phenomenon, but they did not give a positive result.

US foreign debt is increasing every year, but the greatest crisis of the dollar was in 1970, which explains the decrease in the interest rate.The following year, the balance of payments deficit of the state has experienced strong.Free convertibility of dollars into gold was suspended.

To save the Bretton Woods system has done a lot.Intervention worth around 5 billion. Dollars did not give results.After the devaluation of the dollar by 10%, developed countries have made the transition to a floating exchange rate.

Solving the crisis

Until 1973, it was possible to earn good money on operations with currency.But removing the speculative benefits have problems after the fixed rates have lost their relevance.This regime of freely floating exchange rates resulted in the bankruptcy of many large banks.At the same time a large number of financial institutions severely affected.After the system has been officially recognized, international financial relations began to succumb to the regulation.

transition to a floating exchange rate has eliminated most of the shortcomings and problems.Despite the advantages of this mode, they have some drawbacks.First of all it is worth noting the high volatility of currency units (the amplitude of fluctuations in the value over time).In most cases, this adversely affects the international export-import operations.

mode present in Russia

After the default, which occurred in 1998 in the Russian Federation, the following year was launched an adjustable currency.From now on, the government has been able to reduce the extent of the negative impact of the environment on the public sector.The floating exchange rate has been complemented by the introduction of the currency basket.It consisted of a combination of the euro and the dollar.With this action the opportunity to strengthen the management of monetary system.

After the introduction was carried out of the currency basket, the ruble was focus on the two most important global reserve unit.He was less dependent on the US economy.

If the price is outside of the currency basket, the state had the right to intervene in the foreign exchange market quotations.At the moment, it is generally no longer valid, what happened after the global crisis.The government can conduct transactions with foreign currency, regardless of the course.

free floating exchange rate

This mode provides a complete rejection of the government of the state regulation of the national currency against the currency of other countries.Freely floating exchange rate means the movement of the exchange rate, which is determined only by market forces of supply and demand.

examines policies used by a small number of countries.More common is a regulated floating exchange rate.He enjoys greater relevance, because it price varies within the established framework.When it reaches one of the limits, the stabilization is carried out to change the course with the help of monetary authorities.More often than not carried out conversion operations on the open market from a backup, and the national currency.

Effect conversion operations

Conversion transactions are transactions that are aimed at the sale or purchase of currency units that have pre-established time frame, the volume and rate.States that use the floating and fixed exchange rate, may make these operations.They are able to affect the financial condition of the company, a particular region and the economy as a whole.To profit in this way is well-aware of this issue.