The International Monetary Fund (IMF) has an effect on international exchange rates. But what’s its purpose?
What is the International Monetary Fund?
After World War II, in 1944, delegates from the Allied nations met in Bretton Woods, New Hampshire, with the goal to stabilize the world’s monetary system.
Out of the conference came the Bretton Woods Agreement, which created the International Monetary Fund and the World Bank. Both institutions were tasked with promoting a healthy world economy.
- The International Monetary Fund keeps global exchange rates stable. It provides advice to countries to help them create stable economies, and it loans funds to countries that have trouble keeping up with debt.
- The World Bank attempts to eradicate global poverty. It often helps countries with projects like building hospitals and opening access to water. The World Bank also gives loans and technical assistance to countries that want to make economic reforms.
The IMF and the World Bank frequently work together on big challenges. Staff of both institutions communicate regularly with each other, and the institutions often give joint financial support to struggling countries.
What does the IMF have to do with exchange rates?
Among many other benefits, having stable exchange rates gives nations the confidence to trade with one another. If 1 US dollar were worth 0.95 euros one day, then 0.20 euros another day and then 2 euros another day — that would be bad news, wouldn’t it?
Imagine if this happened with every currency around the world. Trade would be a nightmare, and you would hold your breath every time you exchanged currency.
The IMF advises member countries on their economic policies and makes financial investments to keep countries’ economies stable. By doing this, the IMF helps keep exchange rates steady around the world.
An exchange rate is a two-way street: If the value of one currency changes erratically, it drastically affects many countries’ ability to trade. For that reason, the IMF attempts to influence many economic factors that impact currency conversion around the world.
Bottom line
The International Monetary Fund has a big role in ensuring financial stability around the world. Broadly speaking, it helps countries improve their economies and contributes to steady exchange rates.
