when the united states postwar balance of payments surplus turned to a deficit in the 1950s and 1960s the periodic exchange rate adjustments permitted under the agreement ultimately proved insufficient in 1973 president richard nixon removed the united states from the gold standard ushering in the era of floating rates 3
the european exchange rate mechanism erm was established in 1979 as a precursor to the monetary union and the introduction of the euro member nations including germany france the netherlands belgium and italy agreed to maintain their currency rates within plus or minus 2 25 of a central point 4the united kingdom joined in october 1990 at an excessively strong conversion rate and was forced to withdraw two years later the original members of the euro converted from their home currencies at their then current erm central rate as of january 1 1999 5 the euro itself trades freely against other major currencies while the currencies of countries hoping to join trade in a managed float known as erm ii 6developing economies often use a fixed rate system to limit speculation and provide a stable system a stable system allows importers exporters and investors to plan without worrying about currency moves however a fixed rate system limits a central bank s ability to adjust interest rates as needed for economic growth a fixed rate system also prevents market adjustments when a currency becomes over or undervalued effective management of a fixed rate system also requires a large pool of reserves to support the currency when it is under pressure an unrealistic official exchange rate can also lead to the development of a parallel unofficial or dual exchange rate a large gap between official and unofficial rates can divert hard currency away from the central bank which can lead to forex shortages and periodic large devaluations these can be more disruptive to an economy than the periodic adjustment of a floating exchange rate regime real world example of a fixed exchange ratein 2018 according to bbc news iran set a fixed exchange rate of 42 000 rials to the dollar after losing 8 against the dollar in a single day the government decided to remove the discrepancy between the rate traders used 60 000 rials and the official rate which at the time was 37 000 7