international monetary system

Floating Exchange Rates and Recent Developments

Widespread inflation after the United States abandoned gold convertibility forced the IMF to agree (1976) on a system of floating exchange rates, by which the gold standard became obsolete and the values of various currencies were to be determined by the market. In the late 20th cent., the Japanese yen and the German Deutschmark strengthened and became increasingly important in international financial markets, while the U.S. dollar—although still the most important national currency—weakened with respect to them and diminished in importance. The euro was introduced in financial markets in 1999 as replacement for the currencies (including the Deutschmark) of 11 countries belonging to the European Union (EU); it began circulating in 2002 in 12 EU nations (see European Monetary System), and additional EU members have since adopted it. The euro replaced the European Currency Unit, which had become the second most commonly used currency after the dollar in the primary international bond market. Many large companies use the euro rather than the dollar in bond trading, with the goal of receiving a better exchange rate. The record deficits incurred by the United States in the wake of the financial crisis that began in 2007 and the resulting weaker dollar led many central banks to diversify their foreign reserves and greatly increase the percentage held in yen and euros. The growing economic importance of China in the 21st century led, by 2013, to its currency (the renminbi, whose main unit is the yuan) displacing the euro as the second most commonly used currency in world trade.

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The Columbia Electronic Encyclopedia, 6th ed. Copyright © 2012, Columbia University Press. All rights reserved.

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