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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.
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Frequently asked questions
Yes. One way the IMF facilitates trade is by ensuring that countries can easily exchange money with one another. This is important because countries need to buy international goods with foreign currencies.
The Bretton Woods Agreement was principally designed by economists Harry Dexter White and John Maynard Keynes.
An exchange rate is what one currency is worth in another currency. For example, the exchange rate between US dollars and euros could be $1 = 0.95 euros.
Most countries’ exchange rates are flexible, which means they can change from moment to moment. Factors that influence the exchange rate include interest rates, economic stability and inflation.
Kevin Joey Chen is a credit cards writer at finder.com. He's passionate about helping you get your finances in order and travel the world like a pro. He's taken an extended trip around Europe as a digital nomad, gaining firsthand experience with exchange rates, ideal (and not-so-ideal) credit and debit cards, foreign transactions and budgeting strategies. He earned his BA from UC Davis and has written across many niches at Finder, including cryptocurrency, personal loans, car insurance, real estate and money transfers.
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