“The international monetary system refers to the institutional arrangements that govern the exchange rates. The foreign exchange market was the primaryinstitution for determining exchange rates and the impersonal forces of demand and supply that determined the relative value of any two currencies. This supply and demand of currencies is influenced bytheir respective inflation rates and interest rates. When the foreign exchange market determines the relative value of a currency the country is adhering to a floating exchange rate regime.
The worldsfour major trading currencies are the U.S. dollar, the European Union’s euro, the Japanese yen and the British pound are all free to float against each other. Their exchange rates are determine bymarket forces and fluctuate against each other day to day, however the exchange rates of many currencies are not determine by the free play of the market forces; other institutional arrangements areadopted.
Many of the worlds developing countries peg their currency to the Euro or the dollar Mexico can be a clear example of it, another example can be that Chin pegs its currency to the dollar andthe exchange rate between the Chinese Yuan and the euro I determined by the US dollar/ euro exchange rate.
Before the introduction of the euro in 2000, several member states of the European Unionoperated with fixed exchange rates in which the value of a set of currencies is fixed against each other at a mutual agreed on exchange rate.”
Now that we already learn about some definitions of theforeign exchange market and how are these terms related to the euro and the dollar we can start talking about them. In the previous information we can see that both currencies the Euro and the Dollarare both very strong taking in to consideration that they are both part of the four major trading currencies.
Around history we can see that euro and dollar they both dominate the world international...