YOU CAN’T HEDGE AGAINST THE MAIN RISK
In the last 10 years the Deutschemark-dollar exchange rate has gone from 2.60 to 1.72, then to 3.45 and now to about 2.30. The sterling rate rose from 1.64 to 2.42 and then fell to near parity before rising to 1.50. Such gyrations make it almost impossible for businesses to form sensible investment plans. The uncertainty itself limits investment and the currency swings produce distortions in the real economy, such as the squeeze recently imposed on US manufacturing and farming by the high dollar.
Could a monetary system for the whole world run like the European system, and reduce the volatility of the foreign exchange markets?
The arguments against it are familiar.
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