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Dollar Based Exchange Rate System and Foreign Exchange Market Volatility in Bangladesh

Taslim Hasan
Lecturer in Finance
Bangladesh Islami University

Abstract/ Executive Summary:

This paper tries to find out the real causes of volatility in the foreign exchange market in Bangladesh. For this purpose, the performance of the dollar-based fiat currency regime compared to gold standard regime is analyzed, furnishing statistical data. Fixed, Pegged or floating exchange rate regimes in this country have been behaving identically over the last forty years after independence and the dollar appreciated about 1200% during this period. The dollar-based monetary system which is not backed by any real value makes the economy over a bubble one due to its unstable nature of inflation and interest rate. As a result, changing the exchange rate system, government intervention or nonintervention is not the answer to this instability. A gold-based stable currency is a perfect solution as it holds intrinsic value and makes the exchange rate smooth in international trade.

Keywords: Forex Market, Fiat Currency, Gold Standard, Pegged System, Floating Exchange Rate, Bretton Woods

Location: In Bangladesh

Start Date:

End Date:

Program Area: Comparative study

Commodity: Trade, Income generation, Market analysis

Objectives:

The specific objectives of this study are as follows: • To find out the real causes of volatility in the foreign exchange market. • To analyze and compare existing fiat currency regime and gold standard regime. • To recommend some measures to make the market stable permanently.

Methodology:

This article is descriptive in nature. Most of the data used in this article is secondary. Some primary data are collected through formal and informal interviews of different top-level financial experts. Bangladesh bank, newspaper reports and different other financial institutions are the sources of secondary data. Economic data during gold standard regime and the data of dollar regime indicate the instability and its degree. Gold standard and dollar standard are the basis on which the exchange rate is determined. To analyze the gold standard regime, data is taken from the economy of Britain as the gold standard regime was ended before the birth of Bangladesh. After the independence of Bangladesh data is available which is under dollar regime (pegged to pound or dollar). Data of exchange rate was taken from 1974 as the country was liberated in December 16, 1971. After independence, the market was not structured, so data was not available before 1974. Data showing 1971-1974 is also the data of 1974. Data before and after the introduction of the floating exchange rate were taken and analyzed to show the causes of currency instability under the dollar regime. This study analyzes the subject matter from gold and dollar standard point of view, The Advantage or disadvantage of the fixed or floating regime is not regarded in the analysis. • Most of the private financial institutions in Bangladesh were formed after 1990, so the primary data was limited and very few experts were found who have adequate information regarding the exchange rate. There was limited secondary literature on the gold-based international trade and exchange rate system.

Source of Information: Skyline Business Journal, Volume VIII-Issue 1-2012-2013

Article Link (Online Journal):

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

As a gold standard is the most stable currency, the return to the gold standard requires the removal of the reasons that lead to abandoning it and the removal of the factors that lead to its decline. Bangladesh, to save its currency from decline and to turn back economically, requires the following: • Inflation of the country should be curbed by stopping the fiat currency and restoring the dealings with a gold-based currency. • Interest-based economy, i.e. capitalistic economic system should be converted to gold based-real production based economy. It will eradicate interest which is related to market volatility. • Fixed or floating regime should be converted to a controlled open market policy. The government should trade with those countries whose currency will accelerate the gold-based economy, as USA did during 1971 by converting the currency system of all member countries of IMF into dollar-based, surrendering gold reserve to IMF. • As for it to be implemented, Bangladesh should purchase gold and replace the dollar with it. The economic vision of the country can subdue the hindrances and influence trade partners to adopt gold standards. Inept policies suggested and unduly influenced by IMF can never pave the way for a solution. Independent economic policy of the country with the vision to be a regional economic power is inevitable to achieve the goal. Bangladesh, an agricultural country having industrial investment opportunities, seemingly has bright future and penchant for turning into an economic power.

Knowledge Management: Journal