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  3. Exchange Rates: A Brief History of Exchange Rates For centuries, the currencies of the world were backed by gold. That is, a

Exchange Rates: A Brief History of Exchange Rates For centuries, the currencies of the world were backed by gold. That is, a

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问题             Exchange Rates: A Brief History of Exchange Rates
    For centuries, the currencies of the world were backed by gold. That is, a piece of paper currency issued by any world government represented a real amount of gold held in a vault by that government. In the 1930s, the U. S. set the value of the dollar at a single, unchanging level; 1 ounce of gold was worth $35. After World War II, other countries based the value of their currencies on the U. S. dollar. Since everyone knew how much gold a U. S. dollar was worth, then the value of any other currency against the dollar could be based on its value in gold. A currency worth twice as much gold as a U. S. dollar was, therefore, also worth two U. S. dollars.
    Unfortunately, the real world of economics outpaced this system. The U. S. dollar suffered from inflation (its value relative to the goods it could purchase decreased), while other currencies became more valuable and more stable. Finally, in 1971, the U. S. took away the gold standard altogether. This meant that the dollar no longer represented an actual amount of a precious substance—market forces alone determined its value.
    Today, the U. S. dollar still dominates many financial markets. In fact, exchange rates are often expressed in terms of U. S. dollars. Currently, the U. S. dollar and the euro account for approximately 50 percent of all currency exchange transactions in the world. Adding British pounds, Canadian dollars, Australian dollars, and Japanese yen to the list accounts for over 80 percent of currency exchanges altogether.
Methods of Exchange: The Floating Exchange Rate
    There are two main systems used to determine a currency’s exchange rate; floating currency and pegged currency. The market determines a floating exchange rate. In other words, a currency is worth whatever buyers are willing to pay for it. This is determined by supply and demand, which is in turn driven by foreign investment, import/export ratios, inflation, and a host of other economic factors.
    Generally, countries with mature, stable economic markets will use a floating system. Virtually every major nation uses this system, including the U. S. , Canada and Great Britain. Floating exchange rates are considered more efficient, because the market will automatically correct the rate to reflect inflation and other economic forces.
    The floating system isn’t perfect, though. If a country’s economy suffers from instability, a floating system will discourage investment. Investors could fall victim to wild swings in the exchange rates, as well as disastrous inflation.
Methods of Exchange: The Pegged Exchange Rate
    A pegged, or fixed system, is one in which the exchange rate is set and artificially maintained by the government. The rate will be pegged to some other country’s dollar, usually the U. S. dollar. The rate will not fluctuate from day to day.
    A government has to work to keep their pegged rate stable. Their national bank must hold large reserves of foreign currency to mitigate changes in supply and demand. If a sudden demand for a currency was to drive up the exchange rate, the national bank would have to release enough of that currency into the market to meet the demand. They can also buy up currency if low demand is lowering exchange rates.
    Countries that have immature, potentially unstable economies usually use a pegged system. Developing nations can use this system to prevent out-of-control inflation. The system can backfire, however, if the real world market value of the currency is not reflected by the pegged rate. In that case, a black market may spring up, where the currency will be traded at its market value, disregarding the government’s peg.
    When people realize that their currency isn’t worth as much as the pegged rate indicates, they may rush to exchange their money for other, more stable currencies. This can lead to economic disaster, since the sudden flood of currency in world markets drives the exchange rate very low. So if a country doesn’t take good care of their pegged rate, they may find themselves with worthless currency.
Methods of Exchange: Hybrids
    In reality, few exchange rate systems are 100 percent floating, or 100 percent pegged. Countries using a pegged rate can avoid market panics and inflationary disasters by using a floating peg. They peg their rate to the U. S. dollar, and that rate doesn’t fluctuate from day to day. However, the government periodically reviews their peg, and makes minor adjustments to keep it in line with the true market value.
    Floating systems aren’t really left to the mercy of market forces, either. Governments using floating exchange rates make changes to their national economic policy that can affect exchange rates, directly or indirectly. Tax cuts, changes to the national interest rate, and import tariffs can all change the value of a nation’s currency, even though the value technically floats.
The Euro
    On January 1, 2002, the euro became the single currency of 12 member states of the European Union—making it the second largest currency in the world (the U. S. dollar being the largest). This was, to date, the largest currency event in the history of the world; twelve national currencies completely disappeared and were replaced by the euro.
    Although the euro is fundamentally a tool to enhance political solidarity, it also has the economic effect of unifying the economies of participating countries. Some of the euro’s advantages, in regard to economics, include:
    Elimination of exchange-rate fluctuations—the euro eliminates the fluctuations of currency values across certain borders.
    Transaction costs—tourists and others who cross several borders during the course of a trip had to exchange their money as they entered each new country. The costs of MI of these exchanges added up significantly. With the euro, no exchanges are necessary within the Euroland countries.
    Increased trade across borders—the price transparency, elimination of exchange-rate fluctuations, and the elimination of exchange-transaction costs all contribute to an increase in trade across borders of all the Euroland countries.
    Increased cross-border employment—with a single currency, it is less cumbersome for people to cross into the next country to work, because their salary is paid in the same currency they use in their own country.
The two most dominant currencies are______.
选项
答案the U．s．dollar and the euro
解析 由题目中的dominant currencies找到小标题The Euro下第一段第一句…making it the second largest currency in the world(the U．S．dollar being the largest)．(使之成为全世界第二大货币——美元是最主要的货币。)由此可知答案。
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