ABSTRACT
The plight of the lira drew attention to the vulnerability of other high-inflation currencies in Europe. An example of floating exchange rates of currency turbulence with its origin in deep-seated fears about the political and economic future was the plunge of the British pound in 1976. The stability of the mark–dollar rate through most of 1976 allowed other currencies, including the pound, to capture the limelight. The demand for Swiss francs and Deutsche Marks from investors seeking refuge against US inflation risks was to some extent satisfied by international borrowers, themselves anxious to diversify their liabilities and so gain some protection against a possible future sharp recovery of the dollar. One strange element in British exchange rate policy in 1977 was the decision to stabilise the pound against the dollar. Diversification of international investment portfolios out of the dollar and into the mark was to play an important role in the new spell of dollar weakness from late 1977.
