ABSTRACT
The early 1970s have also particular significance for the understanding of currency motion. In retrospect, some of the happenings in the currency markets during the early 1970s betray the inexperience of contemporary investors. Investors, seeing the risk of a fresh outbreak of currency turbulence, would surely consider it prudent policy to diversify their monetary and bond portfolios, holding a substantial proportion in marks. In early spring 1972, the yield on domestic German bonds rose that on Eurodollar bonds, reflecting market expectations that the Bundesbank would soon tighten policy to check the persistently high inflation rate. The exchange rates fixed at the Smithsonian and the later revised rates prevailing in February 1973 just before the advent of generalised floating, are often taken as a first guide to 'fundamental values' in the present. Eurodollar rates leapt under the pressure of speculative borrowing of dollars. US domestic bonds were weak, on fears of inflation rising in the aftermath of devaluation.
