ABSTRACT
The first sign of the need for globalization was received in 1971 from the breakdown of the Bretton Woods System of gold-based dollar-centric exchange rates mechanism established in 1944. The smooth transition to the system of floating exchange rates in 1973 was welcomed with great enthusiasm, both by the policy makers as well as the economic theorists. Being market oriented, the floating rates system naturally showed short term volatility, but the long term trend in major currencies remained in line with their domestic and external monetary and economic conditions, and strengths and weaknesses. The trend of wide variations in exchange rates over the 1980s and 1990s is illustrative of the fact that fixed exchange rates would have placed enormous pressure on the global monetary system and caused severe hardships, dictated by the compulsions to use domestic policy for external adjustments. It may have also guided the global economy into severe recession in the 1980s and 1990s. These last two decades of the last millennium actually experienced exuberant economic growth primarily due to external economic adjustment being taken care of by the exchange rate movements.
