Chaos In The Currency Markets : Currency Crisis Of The EMS

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Term Paper Title	Chaos In The Currency Markets : Currency Crisis Of The EMS
# of Words	801
# of Pages (250 words per page double spaced)	3.2

Chaos in The Currency Markets : Currency Crisis of The EMS

Chaos in The Currency Markets : Currency Crisis of The EMS

1. What does the crisis of September 1992 tell you about the relative abilities
of currency markets and national governments to influence exchange rates?

     The currency markets and national governments both have abilities to
influence exchange rates. Like other financial markets, foreign exchange markets
react to any news that may have a future effect. Speculators are the part of the
currency markets that take currency positions based on anticipated interest rate
movements in various countries. Day-to-day speculation on future exchange rate
movements is commonly driven by signals of future interest rate movements. By
using the signal, speculators usually take the position before the things
actually occurred. Sometime, if high power enough, the speculators position can
influence the exchange rate movement. The government controls is one of the
factors affecting exchange rate. The government can influence the equilibrium
exchange rate in many way, including direct intervening (buying and selling
currencies) in the foreign exchange markets and indirect intervening by
affecting macro variables such as interest rates.

2. What does the crisis of September 1992 tell you about the weakness of fixed
exchange rate regimes?

     From European currency crisis of September 1992, it shows us that there
are weakness of the fixed exchange rate system. When exchange rate are tied, a
high interest rate in one country has a strong influence on interest rates in
the other countries. Funds will flow to the country with a more attractive
interest rate, which reduces the supply of fund in the other countries and
places upward pressure on their interest rates. The flow of fund would continue
until the interest rate differential has been eliminated or reduced. This
process would not necessarily apply to countries outside ERM that do not in the
fixed exchange rate system, because the exchange rate risk may discourage the
flow of funds to the countries with relatively high interest rate. However,
since the ERM requires central banks to maintain the exchange rates between
currencies within specified boundaries, investors moving funds among the
participating European countries are less concerned about exchange rate risk.

3. Assess the impact of the events of September 1992 on the EU 's ability to
establish a common currency by 1999.

     A major concern of a common curre...

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