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International Finance: Recent Developments in Foreign Exchange Markets

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Report Type Reports and Testimonies
Report Date Sept. 24, 1993
Report No. GGD-93-154
Subject
Summary:

Foreign exchange currency trading has grown tremendously in the last decade because of the globalization of financial markets and increased international commerce and investment. Although fundamental economic forces determine long-term exchange rates, the complexity and the variability of these forces make predicting short-term rates highly uncertain. Speculation adds liquidity and flexibility to the market and can be stabilizing. The risks of such speculation, however, create concerns for policymakers. Some recent academic studies suggest that within limits, government intervention can influence short-term movement of exchange rates. Nevertheless, recent experiences with the European Community's exchange rate mechanism demonstrate that exchange rates cannot be sustained at levels that ignore changes in economic fundamentals.

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