Setting the Stage

Abstract

A floating exchange rate typically exhibits wild gyrations. Let us illustrate with a few examples. During the period from 1 August 1997 to 30 March 1998 the yen weakened by some 12 percent against the US dollar. During the same period the Swiss franc weakened by some 5 percent against the Canadian dollar. Exchange rates also exhibit pretty radical swings over longer time periods. From 1 August 1996 until the end of March 1998 the British pound had strengthened by more than 25 percent against the D-mark. The classic example of a massive shift in exchange rates is the path of the dollar. From February 1985 to January 1988 the US dollar price of D-marks and yen more than doubled. These gains and losses are typically no smooth process, rather they take place in leaps and bounds. Figure 2.1 exemplifies with the exchange rate between British pounds and US dollars between August 1993 and March 1998.