Global Economy - Currency Wars

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Global Economy - Currency Wars

  1. 1. 1
  2. 2. Table of Contents1-THE US DOLLAR AGAINST THE EURO........................................................................................................52-THE JAPANESE YEN AGAINST THE US DOLLAR........................................................................................103-THE CHINESE RMB AGAINST THE US DOLLAR.........................................................................................154-THE TURKISH LIRA AGAINST THE US DOLLAR.........................................................................................205-THE BRITISH POUND AGAINST THE US DOLLAR......................................................................................24 BBC News (2009)’ Weaker dollar hits Airbus owner’. 16 November, 2009. [Online] Available at: http:// news.bbc.co.uk/1/hi/business/8361799.stm [Accessed: 3 November, 2010].......................................31Economy Watch (2010) US Dollar, US Currency, USD, US Dollar Exchange Rate. Available at:http://www.economywatch.com/exchange-rate/us-dollar.html [ Accessed: 23 October, 2010].............33 Steverman, B. (2008) ‘The weak dollar and investors’. Bloomberg Business Week. 5 May, 2008. [Online] Available at: http://www.businessweek.com/investing/insights/blog/archives/2008/05/the_weak_dollar_and_inve stors.html [Accessed: 3 November, 2010].............................................................................................35The Economist (2010) Burgernomics: When the chips are down; The latest Big Mac index suggests theeuro is still overvalued. Available at: http://www.economist.com/node/16646178?story_id=16646178#footnote1 [Accessed: 6 November, 201]..................................................................35Yousuf, H. (2010) ‘10-year Treasury yield below 3%’. Cnn Money. 29 June, 2009. [Online] Available at:http://money.cnn.com/2010/06/29/markets/bondcenter/treasurys/index.htm [Accessed: 28 October,2010].........................................................................................................................................................38 2
  3. 3. IntroductionIn recent months the world economy has been on a war footing, at least theoretically. Thishas been as a result of government interventions in order to gain competitive advantage byinfluencing the value of their currencies. Trade surplus countries have initiated “currencywars” over the years by exporting cheaper goods at low currency rates. For instance,because the Chinese government owns most businesses, it is able to keep the Yuanartificially low.During the financial crisis and global recession, there was a sharp decline in world trade.With recovery in progress, in order to gain competitive advantage and accelerated growth,export based countries such as China and South Korea have devalued their currencies tobe able to export more commodities to the global market. In response, trade deficitcountries such as the United States and United Kingdom have introduced monetarypolicies to devalue their currencies in order to be able to compete in the export market. 3
  4. 4. As a result of the competitive devaluation of currencies between USA and China (atpresent, the two world leading economies), the currencies of other world economies such asJapan, Britain and Turkey are being affected. This report will discuss the key factors thathave contributed to the changing value of currencies and the relative merits of currencyappreciation/depreciation. The US Dollar was used as the base currency when the path ofthe currencies of Japan, China, Turkey and UK were being observed over a 12 monthperiod, while the path of the US dollar was observed against the euro for the same periodas above.The first section of this report will examine the path of the US dollar against the euro. Inaddition the causes of the fluctuation of the US dollar against the euro will be related toexchange rate theories.The second section is going to talk about the government interventions undertaken byJapan and USA through the use of monetary policies to gain an advantage on the exportmarket. Hit will also look at the trend of the Japanese Yen against the US dollar and theeconomic implications of its appreciation.The third section will force on the changing of Chinese RMB currency and the forces fromUS to push RMB appreciation.The fourth section of the report will examine the relationship between the Turkish Liraand the US Dollar. Also, the implications of the revaluation of the lira by the governmentwill be discussed.The final section will examine the relationship between the British Pound and the USdollar. In addition, the key factors that affect the British currency will be examined. 4
  5. 5. 1-THE US DOLLARAGAINST THE EUROOmotayo Atunde10244643Word Count: 1,098 5
  6. 6. 1.1 INTRODUCTIONThe United States has the world’s largest economy and the U.S dollar is the most traded currencyin the world. In addition the US dollar is the world reserve currency (Economy Watch, 2010).This section of this report will use appropriate tables and figures to analyze and examine the pathof the US dollar against the euro for a 12 month period. The possible reasons for the fluctuationbetween these currencies will be examined and related to exchange rate theories. The possibleimplications of the intervention of the US government in devaluating the US dollar will also bestated.Table 1 below shows how the United States dollars moved against the Euro for a period of 12months.Table 1.0: Exchange Rates of the U.S Dollar against the Euro for a 12 Month Period. DATE DOLLAR EURO (€) % ($) NOV. 16/09 1 0.6673 - 0.58 DEC. 17/09 1 0.6968 +4.42 JAN. 15/10 1 0.6952 - 0.23 FEB. 16/10 1 0.7267 + 4.53 MAR. 16/10 1 0.7263 - 0.05 APR. 16/10 1 0.7406 + 1.96 MAY. 17/10 1 0.8069 + 8.95 JUN. 17/10 1 0.8078 + 0.11 JUL. 16/10 1 0.7734 - 4.25 AUG. 16/10 1 0.7798 + 0.82 SEP. 16/10 1 0.7648 - 1.92 OCT. 15/10 1 0.7153 - 6.47 Source: Adapted from Yahoo Finance, 2010 6
  7. 7. Figure 1.0: Volume of world merchandise exports, 1965- 2009 (Annual percentage change)Source: WTO International Trade Statistics, 2010Figure 1.0 above show that there was a sharp decline in world merchandise exports in 2009 as aresult of the global recession, which affected major world currencies especially the US dollars(WTO, 2010).Figure 1.1: Path of the U.S Dollar Relative to the Euro for a 12 Month PeriodSource: Yahoo Finance, 2010 7
  8. 8. According to figure 1.1 above the value of the dollar hit an all time low in the 12 months periodrelative to the euro in the period of November 2009 (Yahoo Finance, 2010). It can be noticedfurther in figure 1.1 that the US dollar staged a recovery against the Euro around the period ofDecember 2009 and maintained an increase through January to May 2010. Although the USdollar experienced a few fluctuations during its recovery period as above, it peaked at $1 to€0.8078 in the period of June 2009 which was a 0.11% increase over the previous month.However, the dollar lost ground against the euro during the period of July 2010. Although the USdollar tried to stage a recovery around the period of August, it recorded a dramatic downturnagainst the euro from the period of September through October 2010 (Yahoo Finance, 2010).The possible reasons for these fluctuations will be examined below.1.2 Key Factors:In an attempt to revive the U.S economy in March 2009, the U.S government proposed toembark on “quantitative easing” (Stewart, 2009). The U.S government proposed to buy U.Sgovernment debt and bonds to the tune of $1trillion dollars (Stewart, 2009). Interest rates werelowered at 0-0.25% with the expectation that people in the United States would spend more inthe economy and take advantage of the lowered interest rates to secure loans rather than save.However, the diverse effect of the “Quantitative easing” was that the value of the U.S dollar fellsharply against the euro (Stewart, 2009). On this basis it may be inferred that investors opted toinvest overseas to gain a higher return on their investment in other countries with high interestrates , in that low interest rates does not guarantee high returns on investment (Hill, 2007, p.404– 405). The dollar depreciation around the period of November 2009 could be based on thisreason.The recovery of the dollar that was initiated in the period of December 2009 through May 2010can be related to the recovery of the United States economy during that period (Nohara andNicholas, 2009). Although Interest rates were kept “extremely low” employment and consumer 8
  9. 9. spending trends increased the circulation of money in the economy which improved the USeconomy as a result strengthening the US dollar against the euro (Nohara and Nicholas, 2009).In addition the U.S is widely known as a “safe haven” to invest during economic downturnbecause its treasuries are backed by the US government (Yousuf, 2010). This attracted investorsfrom the euro zone around the period of June 2010, following the fear of investors that theprivate – sector banks might not be able to pay the European central bank loans to the tune of€442 billion which might have a ripple effect on the economy (Yousuf, 2010). Consequently ahigh demand of the U.S dollar by the Euro Zone could have strengthened the US dollar againstthe euro.The downturn of the dollar around the period of September through October 2010 in fig 1.1 asabove can be related to the speculation that the US government was about to proceed on anotherround of “quantitative easing” (QE2). However the impact of the speculation resulted in a “sell –off” of the US dollars which consequently resulted in a continuous fall of the US dollar (Aldrickand Blackden, 2010).The depreciation of the dollar based on investors seeking higher interest rates abroad may berelated to International Fisher Effect which suggests that the value of currencies would changebased on the interest rates of the economy, which may be as a result of inflation (Hill, 2007;Rugman and Collinson, 2006).The “Big Mac” index based on the purchasing power parity theory suggests that price inflationof goods and services in the U.S may cause the US dollar to depreciate in value (The Economist,2010). 9
  10. 10. Although quantitative easing has resulted in the depreciation of the dollar, the 12 month periodexamined is too short to conclude as to whether the fluctuation of the US dollar can beunderpinned by the exchange rate theories examined. This is because it is very difficult toaccurately determine the forces that affect exchange rates (Hill, 2007).1.3Merits of appreciation and depreciationBusinesses can take the advantage of a weak dollar to compete internationally by making theirexports cheaper. As a result manufacturing in the U.S will increase and jobs in the United Stateswill also increase, which is good for the economy. In addition increased exports will help inreducing US trade deficit abroad (Steverman, 2008). However European Aero Space Company(EADS) lost 87m Euros ($130m) in 2009 as a result of cut profits due to a weak dollar (BBC,2009).CONCLUSIONThis section of this report has examined how the US dollar fluctuated against the euro for theperiod of 12months. It examined the possible reasons for these fluctuations and related them toexchange rate theories. Based on the evidence explored above “quantitative easing” has been amonetary policy used by the U.S government in attempt to deliberately devaluate the US dollar.It was suggested that a weaker dollar will make US goods more competitive in the internationalmarket which will consequently increase jobs especially in manufacturing. 2-THE JAPANESE YEN AGAINST THE 10 US DOLLAR Emmanuel Adu-Boakye Word Count: 1,104 10245255
  11. 11. Introduction:This section is going to focus on the competitive devaluation of the Japanese Yen and the USdollar; the government interventions by devaluing their national currencies in order to gaincompetitive advantage and accelerated growth.The beginning is aimed at explaining the relationship between the two currencies using a chat.Also in this section, I will try to explain the causes of the variations between the currencies andin doing so employ a couple of theories of exchange rate movements such as price inflation,interest rates, market psychology and in doing so, employ the theories of demand and supply ofmoney. Finally, I will look at the economic implications of the “currency war” on Japan’seconomy.Figure 2.1Trend of the Japanese Yen against the US dollarSourced from financial times 2010The graph shows that the yen hit a 14year high against the dollar in November 2009 at 84.83since it hit its highest of 79.75 in April 1995 New York Times (2010) but the government ofJapan intervened verbally and saw the Yen weaken against the dollar in January 2010. The bankof japan unveiled a credit steps in December and January when the then finance minister NaotoKan (now prime minister), urged the bank to do more to combat deflation. It can be realised that 11
  12. 12. the yen rose against the dollar again but in June, the Yen fell against the dollar. The Yen declinedto the lowest level 94.98 in two weeks against the dollar after Prime Minister Hatoyama tenderedhis resignation. A senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’ssecond-largest banking group, Masahide Tanaka said “If Kan, who is an advocate for a weakyen, replaces Hatoyama, investors’ expectations will strengthen for the yen to decline.” BusinessWeek (2010). The rise from this point however is accounted for by the Euro crisis which causedinvestors to look for a safe haven in Japan since USA investors lack faith in their economy aswell Smith (2010). This pushed the yen up to 83.07. In September, Japan’s finance ministryintervened in the markets for the first time in more than six years bringing it down to 85.85 butthe currency has been creeping back towards its pre-intervention 15-year highs (financial times2010). One of the major reasons behind this was the announcement of quantitative easing by theUSA government which is a de facto attempt to weaken the dollar. The percentage change in theyen over the year has been -10.62% meaning that for instance, if I had bought one share at90.34JPY in November last year, I would have made a loss of -9.59JPY by now with the yen at80.63 (02/11/2010).Key Factors:Theories of exchange rate movements seem to agree that three factors namely, the country’sprice inflation, interest rates and market psychology have key impact on movements in acountry’s currency. Hill (2007)Figure 2.2 12
  13. 13. Source: Google online images.The circular flow of income in japan has many loop holes which have caused the Yen toappreciate. For the currency of a country to strengthen, all factors being equal, the domesticgrowth rate must be high Dicken (2010). In the case of japan however even though the growthrate is very low, the currency keeps raising so could it be due to external factors?First of all Japan has fallen into a deflationary trap that has cost it decades of economic growth.The countrys central bank announced a scheme to offer 3 trillion yen ($35bn; £22bn) in low-interest loans in an effort to spur economic growth (BBC news 2010a) but it is difficult to makemonetary policies work effectively in a deflationary trap Krugman P. (2010). In deflation, peoplerefuse to take loans no matter how low interest rates might be. Life expectancy is 83years inJapan World Bank data base (2009), there are more elderly people in the economy so thegovernment spends more on retirement benefits. With reduction in savings, money leaving thefirms is not going back into the firms.Also, with low interest rates, Japanese investors invest in overseas assets more than in domesticones. With the rise of the yen, investors are now selling their foreign currencies in order to beable to repay their yen loans. This has brought about an increase in the demand for yen andconsequently an increase. 13
  14. 14. Another factor is the fact that investors shifted to Japan as a safe haven in the Euro crisis. Areport in the China daily (2010) confirms this shift as china made a record investment about $6billion in japan bonds in the first quarter of this year. Again with Japan’s advantage faded in thecarry trade and rising yen, foreign debtors are in demand of the yen to pay their loans BBC(2010).Business and economic implicationsThe appreciation in the value of the yen is not good for Japanese exporters. Exports make a hugepercentage of the Japanese economy. Analysts say the countrys export-led recovery appears tobe faltering as the value of the yen appreciates BBC (2010b)On the other hand, the value of the currency is good for consumers because they are able toimport commodities for relatively cheaper costs. Notwithstanding these benefits to theconsumers, this again goes a long way to hurt the Infant and local industries in Japan becausethey are likely to face competition with cheaper imported good.In any case, more imports should also bring the trading account of japan from a huge surpluswhich is indirectly making the currency appreciate to a balance and eventually get the yen to itsoriginal position.ConclusionThe path of the Yen against the US dollar has been explained and the various interventions havebeen outlined mentioning their effects on the economy as well. It was realised that all theinterventions of the Japanese Government in the past have yielded positive results and pushedthe Yen down in order for exports to be competitive. Even though recent interventions have notbeen successful, it is expected that the Yen will fall in value again with plans on governmentintervention in discussion. Meanwhile, the appreciation of the yen should not have such anadverse effect on the economy because Japan has few natural resources such as crude oil and“raw earths” and therefore rely on import to produce their goods. The appreciation of the yenpresupposes that imports of these raw materials are cheaper for Japanese home-basedmanufacturers. Again, manufacturers are benefiting from the low cost of labour and other 14
  15. 15. resources available in the country due to the deflation situation. Japanese exports have goodwilland will still compete on the markets even at their high prices. 3-THE CHINESE RMB AGAINST THE US 15 DOLLAR Hongyuan Cao Word Count: 1,096 6153258
  16. 16. Introduction:This section will forces on the currency war between Chinese Renminbi (RMB) and US dollars.This section has been composing by three parts, firstly; the report will briefly describe the pathof the currency against the US dollars over the past 12 months. After that, the second part willexplain the key factors that have contributed to the changing value of the currency and commenton the relationship of these factors to exchange rate theories. The final part is the discussion ofrelative merits of RMB appreciation or depreciation.Figure 1 represents the exchange rate changing between RMB and USD in last 12 months. Theexact exchange rate of 1 USD to RMB was 6.64320 on 17th of October, very close to the lowestpoint in last 52 weeks which is 6.64190. According to BBC Business, it is 6.8281 RMB to 1USD in the November of 2009. It means in last 12 months, RMB has appreciated 2.71%, it was adramatically change in the foreign exchange rate for both counties. The factors of this changewill be discussed in next past of this section. Base on the figure 1, the dramatically changing washappened after June of 2010, it is kept very stable before June. Moreover, June of 2010 is not thestart of RMB’s appreciation against USD. According to Worldbank Data, the appreciation ofRMB against USD is start from 2004, the average rate against USD is 8.3 and it is appreciate to6.8 in 2009, approximately 18%.Figure 1: United States Dollar-Chinese RMB Source from BBC Business 2010 16
  17. 17. The following part will explain some factors push this appreciation. Fundamentally, the changingof exchange rate is base on the relationship of supply and demand; moreover, the inflation ratesand interest rates will also influence the exchange rate (Hill, 2007). According to Rofoff (1996),running a deficit on a balance-of-payments current account (a country importing more thanexporting) creates pressures that may result in the depreciation of the country’s currency on theforeign exchange market. However, Chinese General Administration of customs noted thatChinese trade surplus of 16.9 $ billion (Macartney, 2010). Interest rate is another factor ofexchange rate. According to Carbaugh (2000), the increasing of interest rate (relative to foreignnations) is an important factor of increasing of exchange rate. Chinese interest rate is 5.31, butUS is only 0.25, this dramatically distance could be another factor of the exchange rate change(Treading Economic, 2010).Political force is another is an essential factor of the changing because weaker dollar shouldstimulate the economy (Financial Times, 2010). Approximately 53 per cent of American thinkfree trade has been bad for the country (Luce, 2010). According to the report of Wall StreetJournal in October, U.S. steps up pressure on China. Because base on the US-China BusinessCouncil‘s statistics report, US is China’s top export destination in the world, which account18.37% of China’s total export to the world. Furthermore the US balance in the trade with Chinawas -226.8$ billion and the economic growth.At the same time, the force from US is due to further forecasting of US is not gratifying.Economist (2010) said “don’t hang your hopes too high”, the March forecasting of the GDPgrowth for US in 2011 is 2.8%, however, only 6months later, the forecasting is 1.7%. Thisforecasting push US government tends to reduce the unbalance of payment with China to raisethe domestic demand.The possible tariff barrier set by US is another factor. Chinese government want keep RMBstable to protect their export, Wen Jiabao said ‘an unstable Yuan put the global economy in peril’ 17
  18. 18. (Economist, 2010), because export is a significant part in Chinese economic. In 2009, Chineseexport is over 26% of total GDP and it has already decrease from nearly 40% in 2006(Worldbank 2010). However, last September the US imposed punitive duties of up to 35% onimports of Chinese-made tyres (BBC NEWS, 2009). Moreover, according to Tyson (2010), USsenator Charles Schumer said in June, he plans to advance trade-sections legislation. This coulddramatically influence China’s economic and unemployment rate even the stable of politicalsystem.Finally, some relative merits of RMB’s appreciation of depreciation will be discussed.Depreciation of RMB could be a tariff barrier of China. According to Pilling (2010), theundervalued currency is a tariff barrier by other means. As the report mentioned, export is asignificant part of China’s economic. Therefore, the depreciation of RMB could increase theunbalance of payment between China and US. China could take the advantage of foreigncurrency (Carbaugh, 2000) to export more product to US since US is still one of the biggestmarket in the world even is much smaller than China. At the same time, it could also reduce theimport to China, because the price of foreign products will be more expensive. It could increasethe demand for domestic products and this demand is internal, stable and not dependence on anyother country. So it will push China’s economic keep growth.Appreciation of RMB is good news for the business which tends to increase the import. Forinstance, according to WorldBank database, the energy import of total energy use is dramaticallyincreasing in past few years (from -0.2% in 2001 to 7.2% in 2007). The appreciation couldreduce the import cost for these energy organizations. Also it could benefit to Chinese overseastudent in US. By 2020, China hopes to play host to 300,000 international students in the worldand US is one of the major destination of oversea student (Eder, 2010). At the same time,China’s people could buy a US product in China such as Ipad which is very popular in China.Conclusion 18
  19. 19. The political forces from US is the major factor of the appreciation of RMB, and both ofappreciation and depreciation could bring advantage to different industries in China anddepreciation that has served China so well. However, China’s government should not keep theircurrency undervalue, because it could force a US with high unemployment into protectionism(Pilling, 2010). In addition, America will win this currency war- because it has a limitlesscapacity to print dollars (Wolf, 2010). But China also has some unique weapons at its disposalwhich is great capacity to neutralize the impact on the domestic economy (Flanders, 2010). Oneof the most powerful trends to emerge from the currency war is a renewed effort to reduceeconomic dependence on western economies (Dyer, 2010). How to move their economicstructure to a stable and independence form (Dyer, 2010), this structural reform is an essentialissue for China’s government. 19
  20. 20. 4-THE TURKISH LIRAAGAINST THE USDOLLARMustafa Mert Dikmen10252709Word Count: 1,096 20
  21. 21. THE TURKISH CURRENCY AGAINST US DOLLARThis part of the essay will examine the exchange rates between the Turkish Lira and the U.S.Dollar’s relation with each other. In addition, it will discuss some of the main factors that arecontributing to the changing value of TL against the U.S. dollar and the relative merits ofcurrency appreciation and depreciation.Examining trade relationships amongst countries along with their government policies, growthrates and political stability will be contributive when trying to make sense of their mutuallyinterdependent currencies. However, in most cases it is quite difficult to tell whether or not astronger currency or a weaker currency is favourable.Figure 4.1:TURKISH CURRENCY AGAINST THE US DOLLAR IN THE PREVIOUS 12MONTHSThe graph above illustrates the trend of the US Dollar against the Turkish Lira in a one-yearperiod. On October 2009, 0.68 USD was equal to one Turkish Lira. Starting from October theexchange rate between two countries fluctuated around 0.67 until the USD reached a plateau on 21
  22. 22. June 2010 of about 0.62 USD. After the Turkish Lira’s big devaluation on June 2010, the TLstarted to revaluate very rapidly and reached the level of 0.71 against USD. From October 2009to 2010 the value of the Turkish Lira has increased by 4.41% against the USD.KEY FACTORS CONTRIBUTING TO THE CHANGING VALUE OF TURKISH LIRAEconomic growth is one the main key factors that contributes to the changing value of thecurrency in Turkey. If the reason of the economic growth in one country is basically domesticconsumption and budget deficit, the demand of foreign currency and imports will increase,which can result in currency depreciation. However, if the reason behind the growth is foreigninvestment and exports, the currency will appreciate. In the first quarter of 2010, the TurkishGDP has expanded by 11.7% on an annual basis which was the second fastest expansion in theworld after China. In the same period the growth took place, Turkish currency depreciated from0.69 to 0.64 TL against the US dollar. Furthermore, in the second quarter of 2010 the Turkishcurrency appreciated while the GDP reduced by 1.4% to 10.3%. Despite the record economicgrowth, the value of the TL did not appreciate against the USD at all, which indicates that theeconomic growth in Turkey cannot be related to foreign investments and exports. In fact, thedata collected from Hürriyet Daily News (2010) in June suggests that trade deficit has widenedto 6 billion dollars with an increase of 1.8 billion in the previous 12 months.Another key factor which contributes to the changing value of currency in Turkey is the politicalstability. According to The Economist (2010), after the referendum was held on September 12th2010 “Turkey’s growing influence has fostered a new national confidence that has replaceddecades of paranoia and prickliness.” The new politically stabilized Turkey has continued toattract even more foreign investors in the Turkish economy in the previous year. Since FDIrequires purchase of the foreign currency, the demand for the TL increased. The increasingdemand of currency had a triggering effect on the Turkish currency against the USD as the USDdepreciated against the Turkish Lira experiencing its lowest rate of 1.42 TL since January.Trade relations of Turkey have always had an impact on the US economy, given that the USD isused for trade with most of the countries who are in business relationships with Turkey.Accordingly, the US government’s currency policy to lower the value of the dollar is expected toexpand the trade volume of Turkey. In addition, it will encourage the Turkish economy to import 22
  23. 23. even more goods than they are now. Considering Turkey is one of the only few nations that havea trade deficit with USA, the US Commerce Secretary Gary Locke, stated his aims as to doublethe US exports to Turkey (United States Department of Commerce 2010). USA’s successfulpolicy to devalue its currency summing up with Turkey’s politically stable position resulted inthe Turkish Lira to appreciate in U.S. dollar terms. RELATIVE MERITS OF CURRENCY APPRECIATON/DEPRECIATONGetting into debt causes the budget deficit to expand therefore raising the inflation rate. Turkey’sdebt was placed at the 26th spot on a list of 32 most debt-ridden countries with 266 billion dollarsof debt according to World Bulletin 2010. When the huge debt is taken into account, a strongercurrency will be in the favor of Turkey because it is likely to decrease Turkey’s foreign debt.Appreciation of TL will therefore lower the imported commodity prices in the domestic market,slowing down the inflation rate. (World Bulletin 2010) According to TÜİK (Turkish StatisticalInstitute) the CPI and PPI decreased by 0.56% and 0.50% respectively in July 2010 during aperiod when the TL was appreciating.Furthermore, not only will currency appreciation lower the cost of living in the country forcitizens, it will also strengthen Turkey’s relationships with their major trade partners China,Russia, Germany and USA. Turkey’s % 40 increases of imports from China, according to thereport of TÜİK on 2 7th October, can be related to the appreciation of the TL against the USD.On the other hand, a depreciating TL would encourage domestic businesses to export more. Forexample, the Turkish automotive, textile and fresh fruit and vegetables exports decreasedsignificantly because of the strengthening Turkish currency. This decrease in the exports has ledsome of the Turkish exporters to pressure the government for a weaker currency. ( HürriyetDaily News, 2010)CONCLUSION 23
  24. 24. In conclusion, this section of the report identified the fluctuations of the Turkish Lira against theUS Dollar and evaluated the macro-economic effects that had an impact on these fluctuations.This section also illustrated the merits of a strong TL, as well as, a weak TL and discussed whatimplications these advantages would bring to the Turkish economy. Turkish governments recentagreement with China (Today’s Zaman, 2010) to launch trade in TL instead of the usage of USdollar is expected to increase Turkey’s trade volume which is an optimistic step for Turkeyconsidering the Turkish government’s efforts to increase the value of the TL against the USD.Prior to the agreement, every time a trade took place between Turkey and China, the importingnation had to buy US dollars with their home currency revaluating the USD. The findings of thereport suggest that the Turkish government and the central bank have had some influence on theTL from the policies which they have passed regarding the growth rate, political stability andtrade. 5-THE BRITISH POUND AGAINST 24 THE US DOLLAR Mohammad Alkhatib Word Count: 1,091 09249398
  25. 25. Introduction:This section of the report will evaluate the causes of the fluctuation in the value of the Britishpound over the US dollar and identify if these causes are in line with exchange rate theory. Alsoin this section of report will be a graph that shows how The British pound has depreciatedagainst the US dollar over the past 12 months, identify the reasons that caused the Pound todepreciate and explain why the changes in US dollars is important to British economy. Thissection will also evaluate the merits of the appreciation and depreciation of the pound anddiscuss how this will impact the economy and business operating in the British economy.Figure 5.1 : The UK Pound Against The US DollarTable 5.1: The percentage change during the 12 months in the UK pound. 30th September 2009 1st October 2010 1.60 1.58 -1.25% 25
  26. 26. This graph shows the relationship between the British pound and US dollar over a 12 monthperiod. At the end of September 2009, £1 was valued $1.60. However in the middle of May2010, £1 was valued $1.43 and this means that the British pound depreciated in the first quarter.Since then it has remained more or less stable. There was appreciation seen in the British poundafter the month of May 2010, so the cost of one British pound today costs around $1.58.Key Factors:One of the main reasons behind the depreciating currency is the political instability caused by thepolitical uncertainty surrounding the election result on May 6th 2010. During this time of politicaland economic uncertainty investors were wary of UK investments as they will be eagerlyawaiting the outcome of the polls. This was due to the fact that Political elections bringuncertainty and lack of confidence which results in a slowdown of investment ( Torfx,2010).Adam Solomon claimed that “the Pound is declining over the composition of the governmentand this may unsettle financial markets” (Torfx, 2010).The uncertainty surrounded the political arrangement as it seemed the likely result of theelections would be a hung parliament. Consequently, investors could not forecast economicpolicies that would be set by the coalition government as the Conservative Party would now haveto obtain support from the Liberal Democrats in order to pass fiscal or monitory policies. (FT,2010).From the period of May till October, the U.S. currency continued to show weakness. This is dueto increasing inflation rates in the U.K bringing the bank of England closer to hiking interestrates. Also the pressure from the Federal Reserve in the United States to keep interest rates athistorically low levels has caused deflation in the US which has in turn devalued the US Dollar.This is why the Pound gradually appreciated after the Election period against the US Dollar.Trade is probably importantAfter the Election the political future became clearer as investors had an insight into whichdirection the new government will pursue to economic growth. The pound is increasing in value 26
  27. 27. because the investors feel confident in the future of government policies and therefore demandfor the pound is increasing and so too does the value of the pound.The Pound has been rising against the Dollar for the past 6 months, economists mention bothincreasing confidence in UK economic predictions and worries about the US recovery have beenthe reasons for this appreciation. The UK economy has experienced growth in the manufacturingsector, data and secure bank earnings could explain why the UK economy has grown. The UShas struggled to devalue the Dollar using market forces, so it is likely that they will pursue asecond round of quantitative easing, injecting large sums of currency in to the economy toincrease supply and weaken the currency. (BBC, 2010).The merits of appreciation and depreciationThere are many merits associated with a strong currency and a weak currency. The Pound hadbeen regarded as a strong currency in recent years prior to the 2008 Global economic downturn,(BBC, 2010). However, although once valued at over $2, the pound has depreciated against theDollar. The merits of having a stronger currency than a nation from whom you import goodsfrom means imports are cheaper as the Pound will buy more of the foreign currency needed topurchase the imports. (Hill, 2007). The UK is mainly an importer of consumer products.Therefore the standard of living would improve for UK residents as with cheaper imports andalready low exchange rates, consumers will feel confident in buying cheap consumer productsthat will in turn stimulate the economy. Once equilibrium is re-established in the economy thegovernment could increase inflation to curb any excessive growth levels and increase taxes toreduce the trade deficit.Britain is predominantly an exporter of services rather than products and operates with a tradedeficit. Foreign countries will pay for imported insurance and other financial sector servicesprovided by the UK. The implications of a weak currency would benefit the British economy asit would allow more importers of financial services a chance to buy from the UK as the foreigncurrency would purchase more British Pounds. This would further stimulate the economy and 27
  28. 28. also attract foreign investments. Property in the UK is widely accepted to be a stable industry,(FT, 2010). Although there was a price crash post recession, many economists believe theindustry will gain momentum quickly and house prices will rise soon. This will attract a wealthof investors looking to take advantage of the weak pound and buy property in the UK.Conclusion:In conclusion after many fluctuations the pound has weakened slightly against the US Dollar.The reasons for these fluctuations have been attributed to the recent elections held in the UK aswell as speculation regarding future growth in the US. During the political instability of May2010, when it was unclear which government would lead Britain for the next 4 years, manyinvestors were unwilling to invest in the UK.The Pound then began to appreciate against the Dollar as further speculation arose regarding theUS economies underperformance. This lead to concern as with low levels of growth andmounting trade deficits in the US investors were not confident in their economy.There are many merits for an appreciating and depreciating currency in today’s environment. AsBritain is an importing nation with large trade deficits, consumers would be able to takeadvantage of their strong currency with imports. However, many nations are trying to weakentheir currency in order to restore equilibrium in the economy. With a weak currency Britain willbe able to export more financial services and in turn naturally stimulate the domestic economyemerging out of the recession.Conclusion: 28
  29. 29. This report has explained the central importance of competitive devaluation. It furtherdiscussed how several economies were affected from the ongoing “currency wars”. TheCurrency changes of United States, Japan, China, United Kingdom and Turkey have beenexamined over the past 12 months to determine how these countries were being affected bythe currency war. In addition, it also determines the reaction of these countries to thegovernmental interventions from the leading economies of the world.The deliberate devaluation of the currencies of trade surplus countries such as China hasresulted in a “currency war” between major world economies. On the basis of the evidenceexplored in this report, it could be suggested that the United States government have usedthe monetary policy of “quantitative easing” to deliberately devaluate the value of the USdollar in response to this global concern, in order to stage a recovery from the sharpdecline of exports in the United States. Based on the findings it seems that the Chinesegovernment’s efforts to slow down the effects of the US governments growing trend ofprotectionism, which led to a dramatic appreciation in the Chinese currency, is futile;particularly because China’s exports to USA is a significant part of the Chinese economy.It was also realized that the case of Japan’s currency appreciation was somewhat dicey asJapan has internal factors such as deflation and staggered internal growth to deal with.Notwithstanding these peculiarities, the Yen has been adversely affected by the devaluationof the dollar which is in reaction to the low value of the Chinese RMB.Apart from these three directly integrated major economies, the US government’s policiesto deliberately devaluate the value of the US dollar has also affected the UK and Turkisheconomies. Based on further findings, both UK and Turkish economies reacted to the USdollars depreciation after May 2010, with appreciation. In addition to USA’s devaluationpolicies the Turkish government and central bank have had some influence on the TurkishLira’s appreciation from the policies which they have passed on regarding growth rate andtrade. Turkey, in all nations examined, is the only nation which is attempting to revalue itscurrency. The reason of appreciation of the Pound on the other hand, according the views 29
  30. 30. of some economists, is mainly because of the recovery from the political instability thatBritain has suffered. However, it is discussed that the devaluation of the US Dollar hasaccelerated the appreciation of the Pound considerably.The span of the currency wars is not easing to predict, especially when the slow growth ofthe developed world is taken into account. The economic rivalries between nations areresulting in furious interventions from the central banks of emerging economies around theglobe such as Brazil, Switzerland and China. They share the same goal: weakening theircurrencies. A Stanford economist, John B Taylor said “The United States has animportant role in the world economy to maintain stability and confidence in the dollar”. Itis still uncertain whether how the world will react to the instability of the USD.Reference: Adam Solomon. (2010). Foreign Exchange Daily Insight – Pound plummets as electionresults in Hung parliament. [Online] Available: http://www.torfx.com/blog/index.php/foreign- 30
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