In 2004 the New Zealand dollar was worth 44 Japanese yen. By the third quarter of 2007, just before the global financial crisis got into its stride, the kiwi had more than doubled to ¥96. By the first quarter of this year it was once again back to ¥44.
These movements will have created a headache for any businesses endeavouring to trade between the two island nations. Yet rather than being due to perceived swings in intrinsic value of these currencies and the strength of their underlying economies, they were largely caused by financial investors. These carry trade-hunting speculators borrowed cheaply in Japan and put the proceeds to work in high interest rate New Zealand during the good times, only to unwind their positions as the financial crisis struck.
Such is the way of the world since the scrapping of the Bretton Woods system of broadly fixed exchange rates in 1971. Developed countries have largely embraced free-floating exchange rates, while developing nations have increasingly been pushed to relax their managed floats.
Even in the current crisis, when governments and regulators have railed against the impact of financial speculators on everything from commodities to mortgage finance, few mainstream voices have suggested that currency markets – perhaps the single most systemically important asset class – need to be reformed.

When it works
Yet China, quite possibly the fastest-growing economy in history, with growth of around 10 per cent a year for the past three decades, has managed this with the aid of an essentially fixed exchange rate.
Europe and the US enjoyed their most rapid periods of growth when the gold standard, which limited exchange rate volatility, was the norm.
Despite this, it has been left to a handful of voices around the fringes of the debate to question the current laissez-faire approach.
The United Nations Conference on Trade and Development (Unctad) last month argued that an internationally agreed exchange rate system based on constant real exchange rates (ie with the nominal level only moving to take account of inflation differentials) “would go a long way towards reducing the scope for speculative capital flows that generate volatility in the international financial system and distort the pattern of exchange rates”.
This system, Unctad believes, would reduce the scope for gains from the carry trade, because higher inflation and interest rates would be balanced by a fall in the nominal exchange rate.
The body argues it would also prevent currency crises “because the main incentive for speculating in currencies of high-inflation countries would disappear. And overvaluation, one of the main destabilising factors for developing countries in the past 20 years, would not occur”.
Under this proposal, the central banks of all signatories to the system would have an obligation to intervene in currency markets to ensure real exchange rates are held constant.
However, few seriously believe such a global system is likely to be introduced.
“My sense is there is no desire to tighten up the regulation of FX per se,” says Marc Chandler, head of global currency research at Brown Brothers Harriman. “I do not see any desire to go to a fixed exchange rate. I think the lessons of the crisis are the opposite.
“Thank heavens the UK can devalue,” he says, referring to the benefits of a weaker currency for the UK, as opposed to neighbouring Ireland, which is likely to need sharper real wage cuts to regain international competitiveness because the euro has remained strong.
“The crisis was fairly profound, but it was not about FX markets. I think it’s a non-starter to fix something that did not cause the problem,” adds Mr Chandler. “I’m sympathetic to the idea that some of the greatest growth that has taken place in capitalist markets happened under fixed exchange rates, and we wouldn’t want to kick the ladder away to stop others catching up. But for more mature economies such as the UK, I’m not sure a fixed exchange rate would have helped. I don’t see any evidence that the US or Europe wants fixed exchange rates.”

Currency transaction tax
A less radical proposal that has a little more momentum behind it is that of a Tobin tax that would throw sand into the mechanism of the global FX machine.
Lord Turner, chairman of the UK’s Financial Services Authority, divided opinion last month when he called for such a tax on financial transactions to cut the financial sector down to size.
However, the idea of a Tobin tax for the currency markets has been knocking around for a number of years. The idea is being pushed by Stamp Out Poverty, a network of charities, which wants to use the money raised to help tackle poverty in poorer countries.
But those behind the initiative, dubbed a currency transaction tax (CTT), also believe it could aid business by reducing exchange rate volatility and thus the costs of hedging against adverse currency moves.
“Volatility in [the FX] market caused by currency speculation is a significant threat to economic stability,” Stamp Out Poverty argues.
In May, Bernard Kouchner, the French minister for foreign affairs, launched a working group of countries to study these proposals, with Spain, Brazil, Chile and Norway reportedly interested in participating.
Stamp Out Poverty’s proposed scheme would have two layers. In normal circumstances, there would be a very low tax of maybe half a basis point.
David Hillman, coordinator of Stamp Out Poverty, argues such a tax on the four most traded currencies would raise $33bn (€22.5bn, £20.8bn) a year and “lead to a 14 per cent reduction in the volume of transactions of the most speculative kind”.
The second strand would be a “circuitbreaker”, a higher tax rate that could be employed temporarily to fend off a currency crisis, in the belief

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