International Finance:

Recent Developments in Foreign Exchange Markets

GGD-93-154: Published: Sep 24, 1993. Publicly Released: Oct 15, 1993.

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Pursuant to a congressional request, GAO reviewed emerging issues in foreign currency exchange markets, focusing on: (1) developments in the foreign exchange market; (2) the economics of foreign exchange rate determinations; (3) the role of speculation in foreign exchange trading; (4) the efficacy of government intervention to influence exchange rates; and (5) the European Exchange Rate Mechanism (ERM) crisis in September 1992.

GAO found that: (1) the foreign exchange market has significantly changed over the past decade and become more complex; (2) there is no definitive explanation of what determines short-term exchange rate movements; (3) over the long term, fundamental forces in national economies such as interest rates, inflation rates, current account balances, international capital flows, and economic growth rates determine exchange rates; (4) while speculation and risk are important to the efficient functioning of financial markets, they are always areas of concern to policymakers; (5) the government's exchange rate policy must consider market forces in order to set realistic objectives; and (6) government intervention can influence only short-term exchange rate movements.

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