Post-World War II.

Britain lost much of its financial prominence during world war II.Following the war,the U.S dollar became the dominant currency.Sterling still continued to play a key role,nevertheless,because of a frequent scarcity of dollars and the leading role of London as a financial center.Government involvement in markets occurred fairly often in the 1930's,became more prevalent in the early post-World War II era,and has, in fact continued ever since.Unlike the post-World-War I  period,which witnessed wild fluctuations in currency markets,the 25 years following World War II were characterized by stability and tight controls on currency values,with most currencies pegged within a narrow trading range.

The starting point for the post World-War II era actually began before the end of the war,with a United Nations conference held at Bretton Wood,New Hampshire.Memories of the great depression and of the financial aftermath of World War I remained clear in the delegates' minds.At the conference,the intent was to develop a framework that would create stability,generate confidence,and thereby,foster worldwide growth and prosperity.

The Bretton Woods Agreement in 1944 did bring the desired stability and order to the foreign exchange markets.Exchange rates for the major trading currencies were pegged to the U.S dollar,which,in turn,was pegged to gold at the rate of $35 per ounce.The pegs for individual currencies were adjusted from time to time in response to market pressures.The U.S dollar became the reserve currency of choice for many central banks because,for central banks,the United States guaranteed convertibility of dollars to gold,on demand,at the pegged rate.

The pegged-exchange-rate system broke down in 1971,largely due to payment imbalances among countries and to the sharply increasing foreign holdings to the U.S dollars.After an attempt to reinstate the system in 1973,a period of primarily floating exchange rates began,which is still in effect.The major trading currencies float under the watchful eye of their respective cental banks.The banks intervene in the open market from time to time to foster more orderly trading in the currency or to try to nudge the rate in the direction considered desirable at that time.Currencies of smaller countries are frequently pegged to one of the major currencies,usually the U.S dollar or the currency of the country with the closest trading ties.The floating-rate system clearly makes future spot rates more difficult to anticipate,but is much better equipped than it's predecessor to handle the pressures and shocks experienced by the foreign exchange markets in the last 20 years.

Patrick Abboud
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