Out of the Woods, but what’s Next for global Currencies?

The subject of global currency re-evaluation is an interesting one. For every column inch written in its favour, there is a counterpart admonishing it. The latter argument is well founded. You would struggle to find one government willing to hand over control of its monetary policy, let alone a globe full of them. It will take a catastrophe on an international scale to encourage world powers to seriously consider currency re-evaluation, writes FTXM's Communications Manager, Emma Davidson.

The Bretton Woods Agreement was the first of its kind, a cooperation by the Allied Nations to standardise currency – and it only took two World Wars and fears of a second Great Depression to bring it about. The agreement fixed the international gold standard to the U.S. Dollar, creating a ‘pegged rate.’ Members committed to maintain exchange rates with 1% of the greenback with currency trading and money supply measures. 

As the primary reserve currency, USD effectively took on the same role as gold. Ultimately, it was this affiliation with a single currency that killed Bretton Woods; national currency values are vulnerable to national politics. When the Nixon Administration declared in 1971 that it was uncoupling the USD from gold and terminating its convertibility, Bretton Woods fell apart. With no pegged rate, currencies began to float freely and, by 1973, the fiat system that governs forex trading today was established.

Enter the fixed vs. floating rate debate, a running theme in the currency re-evaluation rhetoric. The global crisis in 2008 was about as close as we’ve come since the 1970s to a global event with the power to convince multiple governments to fix exchange rates again. But that would require central banks to willingly limit their ability to control money supply and, even in the grips of the worst economic event in living memory, not one was willing to hand over the reins.

Among the champions of currency re-evaluation are the Chinese. The RMB is the most recent addition to a ‘basket’ of currencies known as SDRs (Special Drawing Rights). Created during the USD crisis in the 1960s, the value of an SDR unit was initially defined as equivalent to 0.888671 grams of fine gold. By 1973, the mechanism became valued by a weighted basket of currencies – the USD, EUR, GBP, and JPY (the RMB was added more recently).

The Chinese interest in SDRs as a global reserve currency is obvious, with the RMB in the basket, it gives China greater fiscal influence. But SDRs currently lack the liquidity to function as a global reserve currency, there simply aren’t enough in circulation to support international monetary policy. This could actually be good news for China, and many economists are championing RMB as the next reserve currency. For the moment, this still seems a little implausible – there are obvious limitations to its tradability, and the question mark over the authenticity of official growth statistics will need to be addressed at some point. Still, China’s economy continues to grow at a pace, and is set to do so quicker than Western counterparts over the next twenty years.

While global currencies float freely, they are vulnerable to geopolitical developments and heightening global tensions and, as long as the globe is in a state of flux, revaluation will remain a hot topic. Those with an interest in forex trading will appreciate just how volatile this year has been, and tumultuous times certainly do their part to bolster the argument for currency revaluation and fixed exchange rates. With no global catastrophe in sight, revaluation seems unlikely, but it will not be taken off the table, and 2017 has shown us that nothing is outside of the possibility realms.

 

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NOTES TO EDITORS

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