The relation is established against the USD. The Bretton Woods agreement defined the United States Dollar as reference currency for all others and, to this day, all exchanges between currency pairs are done thru the USD. For instance, if you exchange pounds for yens, the back-office mechanism is exchanging pounds for US dollars and then US dollars for yens. If you look closely, the GBP/JPY exchange rate is equal to GBP/USD * USD/JPY.

Also, until 1971 the GBP did not free float. Its rates were fixed against the USD. The free float came after that.

Now, nowadays and for the last 5-7 years, yes, the forex market has been heavily manipulated by central banks. That was not the case before. However, this I must stress, central bank intervention does not change much the true market value of a currency. Historically intervention has been useless in the medium and long terms.


That is one of the falacies of the Euro, the assumption that a common currency could benefit all equally.


Not so fast. Anyway, the same problem would remain for Portugal and France are very different economies. On another note, for certain countries, like Portugal, a weak currency while appearing as a good thing, given that the Portuguese can't govern themselves, would be terrible and lead to further impoverishment.

One thing is to use a one-time currency devaluation as a way to boost exports and economic development. A whole different thing is to enter the cycle of devaluation-inflation which is what Portuguese governments did since 1974 until the introduction of the Euro. This leads to an increasingly diminished value of a country's currency thus making those who use it poorer.