Currency Contracts, Pass-Through, and Devaluation

Abstract

PAST TWO YEARS have marked a departure from the relative stability in international markets since World War II.The difficulties began with the deterioration in the United States merchandise trade balance in 1971.Large movements of short-term capital also occurred as anxiety over the dollar increased.The result was imposition of an import surcharge and suspension of gold convertibility by the United States on August 15, 1971.Throughout the fall of 1971, the dollar depreciated on foreign exchange markets relative to most major currencies.With the Smithsonian agreement in December 1971, the U.S. import surcharge was removed and a new set of fixed parities was agreed upon, with wider bands than had existed previously.In June 1972, a sterling crisis erupted, leading to a float of the British pound.Even though the monthly trade balance for the United States improved little in 1972, two events stimulated confidence in the dollar after the sterling crisis: Late in August, U.S. money market rates rose significantly, and the efforts of the United States to halt inflation appeared to be achieving some success while inflation was worsening in Western Europe.'However, late 1972 was marked by mounting apprehension over the strenorth of the collar Some Western Fiironean couintries hbenn to tirhten