global economy currency war
TRANSCRIPT
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TABLE OF CONTENT
Content Page
1 Cover Page 1
2 Table of Content 2
3 1.0 Introduction
1.1 Competitive Devaluation
1.2 Significance of Competitive Devaluation
1.3 Structure of Report
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4
5
4 2.0 International Currency Wars
2.1 United States of America
2.1.1 Introduction
2.1.2 Describing the US Dollar Against Euro
2.1.3 Key Factors Influencing Value
2.1.4 Negative and Positive of Dollar Appreciation and
bbbbbbbbbbbbbbbDepreciation
2.1.5 Conclusion
2.2 Republic of China
2.2.1 Introduction
2.2.2 Chinese Currency Fluctuation
2.2.3 Factors Resulting In the Peg of Chinese Currency
2.2.4 RMB Appreciation and Its Effects on Chinese
vccccccccccccccccEconomy and Business
2.2.5 Conclusion
2.3 Japan
2.3.1 Introduction and The Currency Path
2.3.2 Factors Contributing to The Changing value of the
gggggggggggggggCurrency
2.3.3 Relative Merits of Appreciation and Government
hhhhhhhhhhhhhhhIntervention
2.3.4 Conclusion
2.4 United Kingdom
2.4.1 Introduction
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2.4.2 GBP Sterling Against the US Dollar Analysis
2.4.3 Factors Which Have Changed the Value of the
vvvvvvvvvvvvvvvGDP Sterling against the US Dollar in Relation to
vvvvvvvvvvvvvvvTheories
2.4.4 Implications of Currency Appreciation and
ffffffffffffffffffffDepreciation
2.4.5 Conclusion
2.5 Malaysia
2.5.1 Introduction
2.5.2 Path of The MYR in The Past 12 Months
2.5.3 Key Factors That Contributed Towards Fluctuation
2.5.4 Advantages of MYR Appreciation
2.5.5 Conclusion
2.6 Germany
2.6.1 Introduction
2.6.2 EUR/USD Exchange Rate Analysis
2.6.3 Conclusion
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5 3.0 Conclusion 38
6 References 39
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1.0 Introduction
1.1 Competitive Devaluation
Competitive devaluation is also known as currency wars where nations across
the world struggle to depreciate their own currency to help their domestic market.
According to Xinhua (2010), this is the situation where a country depends on its own
economic power to best its competitors and take hold on other nations affluences
through monetary and foreign exchange policies. Such policy was for a specific
purpose and usually with sizeable destructive power but nowadays such war was
much friendlier.
1.2 Significance of Competitive Devaluation
One of its importances is because of its capability of reducing trade deficit.
When a currency is devalued, exports can be stimulated and as a result it will not just
increase the countries income but it will also increase employment within the country
(Xinhua, 2010). This is because more exports will lead to more productivity which
requires more labour. Whether or not to adopt such policy must be made after due
consideration because of its danger in the long run. The interest conflict between
countries will become even worse which eventually did not solve the problem due to
more and more countries adopt such policy.
Besides that, competitive devaluation will guarantee inflation. Although
inflation is generally seen as an unpleasant moment but in some cases it helps protect
the wealth of certain groups of people. In terms of gold, it helps ensuring gold price to
keep rising and thereby protect the gold investors prosperity. (Adask, 2010)
Furthermore, devaluation can help solving the product-surpluses problem. This is
justified by Xinhua (2010) who mentioned about increase exports when currency
devalued.
Other than that, competitive devaluation or depreciation in currency can help
easing a governments burden to hold more foreign exchange reserve. These reserves
are particularly useful in the future for protecting their own currency. This applies to
countries that have a fixed exchange rate. It is also important for floating exchange
rate during a period where the fluctuation is intense enough to cause havoc to theglobal economy. (Wifle, 2008)
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1.3 Structure of Report
This report comes with a simple format which divides into three parts:
introduction, body and conclusion. The body was further divided into six sections
resembling six different countries: USA, China, Japan, UK, Malaysia and Germany.
These six sections includes the currency path for the past twelve months from the six
countries, key factors that contributed towards the fluctuation of the exchange rate and
merits of currency change as impacts to those countries.
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2.0 International Currency Wars
2.1 United States Dollar (USD) Against Euro (EUR)
2.1.1 Introduction
The U.S. dollar occupies the basic monetary unit between different countries
all over the world, as well as, it belongs to the official currency of the America. In this
report, different factors affect the value of dollar, which include balance of payment,
interest rate of America, economic index, and inflation. Moreover, summarizing these
factors, to analyze positive and negative for appreciation & depreciation of the U.S.
dollar, which combing with activities of governments and local businesses in
America.
2.1.2 Describing the US Dollar Against Euro
There is a curve chart as figure 1-1 to shows the U.S. dollar against the Euro
between October 30, 2009 and October 29, 2010, the general tendency rise by
+0.0531 (7.97%) during the last one year.
Figure 2.1.1: The Exchange Rate of the U.S. Dollar Against the Euro
The Exchange Rate of the U.S. Dollar Against the Euro , (google.com, 2010)
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Depend on the curve chart to know that the value of dollar belonged to quite
low value before 2010, while there was sharp growth up to 0.8386 on June 8 th, 2010.
However, it fell back until August 6th, 2010 to 0.7532, but it was much higher than the
value of currency before 2010. After a brief rally value of dollar fell back to a now
low until October 14th, 2010 that the value of the U.S. dollar fluctuated between 0.700
and 0.725 in the last one months.
2.1.3 Key Factors Influencing the Value
Now, explaining relative influencing factors of economy situation of America
via vary of exchange rate for dollar. China as an important trading partner for
America, due to trade could create more jobs opportunities for areas of the Pacific,
and improve the life quality for residents. Trade boost local economic development,
on the other hand, trade gaps lead to huge US trade deficit. From the figure 1-2 to
know, with increasing export to China since 1999, a growth trade of imports that
widen differences in trade deficit until now.
Figure 2.1.2: U.S. Monthly Trade Balance with China between 1990 and 2010
U.S. Monthly Trade Balance with China, (money.cnn.com, 2009)
The export amount was less than import amount thus lead to America trade
deficit. Making exports less competition within foreign market, as well as, increasing
the quantity of import goods from other nations. Therefore, the payment of currency is
much more than income in America, that leads to the U.S. dollar decrease value.
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According to Krugman (2003), interest rates play as important role within the
foreign exchange market due to the large deposits traded should pay interest. Banks of
different nations use interest rate to adjust and control capital flow. Comparing
interest rate between European Monetary Union and United States as figure 1-3,
current interest rate of European Monetary Union (1.00%) is higher than that of
America (0.25%).
Figure 2.1.3: Europe and North America Interest Rates Table
Europe and North America Interest Rates Table,(fxstreet.com, 2010)
As investors, in order to avoid the risk of interest rate, transfer currency from
low interest rate to high interest rate in other nation, in order to obtain more benefits
by high interest rate. While, central bank of nation adjust interest rate to control
balance of investment yield for economy of local. Policy, quantitative easing, could
push interest rates down, prompting investors to run away from the dollar and flock to
higher-yielding assets.(CNNMoney.com, 2010) The U.S. dollar drop against others
international currencies, which include the Euro, the Japanese Yen and China Yuan,
due to capital outflow of the U.S. dollar.
With increasing the quantity of import goods from others areas, that also affect
the amount of currency in local. Interest rate as modified by inflation, interest rate of
America belongs to low level (0.25%). Depend on the lower interest of America to
analyze inflation affect exchange rate, consumers will pay more money to purchase
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goods and services without saving in bank, as well as, lead to more money in
circulation in social. Therefore, leading to the price of goods and services growth, and
purchasing power weaken.
Figure 2.1.4: Over-The-Year Percent Change in CPI-U
Over-The-Year Percent Change in CPI-U, (http://www.bls.gov, 2010)
Via searching related data of Consumer Price Index on October 15, 2010, this
was increasing consumer level as a whole. Over the last 12 months, the food index
rose 0.6%. The energy index rose 1.1% over the last year, with gasoline and natural
gas rose at a faster pace, up 6.4% and 7.7%. However, the index for all items less food
and energy rose 1.2 % in August and September 2010. (CNNMoney.com, 2010) As
this situation, belongs to inflation, devaluation was result from increase the price of
goods and services in America.
2.1.4 Negative & Positive of Dollar Appreciation and Depreciation
To increase the value of the U.S. dollar that improving inflation situation in
America, pressing the price of goods and services via governments control.
Especially, investors would like to buy securities to earn more benefits, which are
increasing the purchasing power parities. However, there are negatives for dollar
appreciation. The export of America and local businesses both face risks of trade,
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such as supply exceeds demand thus possible leading to supply surplus that could
drive down prices.
Figure 2.1.5: The Trend of Percentage of Unemployment During 2009
The Trend of Percentage of Unemployment During 2009, (gallup.com, 2009)
On the other hand, depreciating the U.S. dollar that America direct affect the
price of goods become lower in America, thus enhance related businesses
competition in the international market. That good for stimulation export thus push
the economy of America resurgence and avoid deflation. However, increasing the
unemployed rate becomes an important problem in America, figure 1-5 shows current
decline below 50%. Government spending becomes less to resolve the problems of
America and affect directly relevant welfare for employees.
2.1.5 Conclusion
In conclusion, the U.S. dollar moderate depreciation is advantage for the
economic development of overall world. Government intervention of America as an
important tool to adjust the demand and supply for U.S. dollars via change exchange
rate, that governing with development of local businesses economy. In order to
control balance of trade between export and import via trade barrier, as well as, also
influence activities of businesses to improve their competitive competence and
benefits via changing dollar. Exchange rate are affected via vary of economic index,
which includes the prices of goods and services, unemployment rate and credit
availability during consumers activities in America.
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2.2 China Yuan Renminbi (CNY) Against United States Dollar (USD)
2.2.1 Introduction
For around last 15 years the Chinese government has intervened in currency
markets to control the appreciation of Renminbi (RMB : meaning peoples own in
Chinese). The regulation aims to attract FDI and keep its industrial products cheap
internationally thus a major reason for its economic growth (Tung and Baker, 2004).
Opponents of the regulation term the measures as a manipulation to ensure cheap
exports and expansive imports into China. (Frankel, 2006)
Based on strong pressure from other nations China has allowed gradual
appreciation against world currencies however the global recession and economiccrisis again forced the Chinese regulators to follow a controlled rate . This slow rate
of appreciation is also criticized by world economists terming the RMB appreciation
an important factor to rebalance the world economy while citing meeting local
consumer demands and increasing imports into China as key benefits to China.
(Zhang and Pan, 2004)
This paper revisits the history of RMB fluctuations to study the factors
resulting in its relative peg against dollar and aims to shortlist the merits to Chinese
economy if it is allowed to float freely.
2.2.2 Chinese Currency Fluctuations
Before 1994 China maintained a two layered exchange system where fixed
interest rates and swap market rates for imports and imports co existed. The two rates
were joined in 1994 at 8.70 to the dollar and revised to 8.28 in 1997 the rates then
remained constant till 2005. (Brahm and Li, 1996:127, Lu, 1994) In July 2005 the
rates were half floated based on market supply and demand , resulting at a rate of
8.11 Yuan (Joseph Stiglitz ,2005) ; 2.1% appreciation. This pegging was not truly
floating with maximum movement of 0.3 % allowed. Thus RMB slowly rose and
reached 6.83 to dollar in July, 2008 (20.8 % appreciation ) . The summary of data is
reflected in Figure 2.2.1.
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Recent RMB Developments:
ON 22nd of June this year RMB was devalued 1.43% to 6.80 to a dollar.
Threatened by further sanctions and legislations, till October 1st, the RMB has been
further cut by 1.9%. Refer to Figure 2.2.3 below.
Figure 2.2.3:
2.2.3 Factors Resulting In the Peg of Chinese Currency
The currency control of the RMB has been found to be somewhat different
from conventional floating exchange rate theories since the Chinese government has
been directly involved in the control of RMB. Various factors resulting in this control
from the Chinese prospective have been discussed as of below.
One of the first argument provided by the Chinese is regarding the peg is the
fact that is being used to ensure stabilization of internal economy through growth
rather than aim of increased exports. However it is quite clear that the policy reflects
the government desire to attract FDI to gain technology , know-how and to increase
growth. (Jensen ,2006) The Chinese defend the gradual appreciation in currency by
stating the fact that the dynamics of a nation where 40 million people still live lessthan a dollar a day cannot be compared to a developed economy . (Fernald et all 1999)
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2.2.4 RMB Appreciation and Its Effects on Chinese Economy and Business
It is quite clear that an under quoted RMB will increase FDI , give boost to
countrys exports however such policy can have following long term demerits for the
country
Demerits of Currency Regulation
Such protection measures can result in a country depending more and more on
its exports thus always exposed to global conditions. Furthermore an undervalued
currency will result that all the imports coming to China in terms of machinery and
tools etc are being bought are expansive. From the prospective of an international
buyer, instead of giving benefits to own country China is in fact giving subsidy toother nations by keeping its currency depreciated. By using the pegged system, the
Chinese government losses its ability to control monetary policy, thus resulting in
internal inflation and easy credit policies by the banks which has resulted in over
saturated real estate sector.
Merits of a Currency Appreciation through deregulation
Even if we agree that some adjustment costs would be there the merits of thesuch a move include the rapid boost to Chinese trade by a increase in its imports on
the money received from exports, It allows a greater flexibility to Chinese government
by channeling money to ineffective to effective sectors. It helps in lowering prices of
imports thus providing better quality of life to consumers. It will increase the domain
of government to influence its monetary policies furthermore it will also help in
resolving income and growth disparities between different regions. Last but not the
least such a move will develop the trust that is very important between China and its
trading partners all over the globe.
2.2.5 Conclusion
There is no doubt that the Chinese economy due to its relative size ,
unsaturated nature and growth potential will continue to lead the global growth and
development in the years to come. However in the age of globalization it becomes
very difficult for a nation to take economic decisions independently. The situation is
further compounded by the fact that global recession is directly affecting Chinas
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growth. Through the analysis carried out in the paper we have come to know that the
only way forward for China is through currency appreciation. For the government it
provides such important benefits as ease of regulations , control of inflation , focused
development of sectors, removal of wealth disparity and improvement of quality of
life , while for the businesses it means cheaper imports, and sustained growth .
Therefore deregulation of RMB by the Chinese government should be the policy
decision.
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2.3 Japan Yen (JPY) Against United States Dollar (USD)
2.3.1 Introduction and The Currency Path
The economy of Japan is one of the most vibrant and booming economy in the
world. High amount of western influence together with the government policy of
Laisser-faire was mostly responsible for the significant growth in the economy of
Japan in the post second world war period. This report will be looking at the current
issue of competitive devaluation and its economic and business implications.
Figure 2.3.1 (Bank of Japan Foreign Exchange Rate)
October 2009
90.28
November 2009 89.11
December 2009 89.52
January 2010 91.26
February 2010 90.28
March 2010 90.56
April 2010 93.43
May 2010 91.79
http://images.google.co.uk/imgres?imgurl=http://www.uni.edu/becker/japan1.gif&imgrefurl=http://www.uni.edu/becker/japanese.html&usg=__93c9gBoy2cVE7Tb3QipfGVT142s=&h=367&w=323&sz=9&hl=en&start=2&um=1&itbs=1&tbnid=cW5i6Y7oxtxasM:&tbnh=122&tbnw=107&prev=/images?q=japan&um=1&hl=en&sa=N&tbs=isch:1 -
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According to Bloomberg, Yen drops on concern Japan may weaken currency,
(by Paul DobsonOct 26, 2010). The yen slid from its strongest level in 15 years
against the dollar amid concern Japanese authorities may renew action to weaken the
currency. The yen slid 0.7 percent to 81.40 against the dollar at 8:28a.m in New
York, from 80.81 yen yesterday, when it reached 80.41 yen, the strongest level since
April 1995.
Japans currency has appreciated more than 5 percent against dollar since
authorities intervened in foreignexchange markets for the first time in six years on
September 15.
2.3.2 Factors Contributing to The Changing value of the Currency
Industrial Production:
The IP Index, measuring trends in the output of Japanese manufacturing,
mining and utilities, is extremely important for gauging the state of the economy. The
outlook for production is highly dependent on the strength of Japanese exports.
However, an impending yuan revaluation is a key issue because this will tend to
increase Japan's ability to export to China and also boost the competitive standing of
Japanese products on other countries' store shelves.
Foreign Trade:
Import and export figures measure the value of goods shipped into and out of
Japan. Exports figures are usually closely followed, along with imports figures, which
indicate the strength of domestic demand. Although China has been the chief
contributors to Japanese export growth in recent years, the U.S. economy is regaining
sway in becoming the most important market for Japanese companies. Forecasts
indicate that the re-emergence of the U.S. is a very good thing for Japan. However,the U.S. will take time to have as dynamic an effect in Japanese sales as China has
June 2010 90.89
July 2010 87.67
August 2010 85.44
September 2010 84.31
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had in the past. Predictions are that double digit export growth figures are unlikely
until China develops a renewed taste for Japanese wares.
Inflation Rate:
Inflation is the result of rising prices in an economy over time. In other words,
when the inflation rate is positive, a currency buys fewer goods than it did in the
previously. Japan has had one of the lowest inflation rates since the mid 1990s. In
fact, price levels in Japan decreased between 1998 and 2004. The low inflation rate
has kept Japanese products cheap compared to products from other countries, making
Japanese industries more competitive. This has added to Japan's export growth and, in
turn, increased demand for the Yen. The inflation rate is also dependent on the value
of the Yen since a weaker currency leads to greater demand for Japanese products and
makes imports more expensive for Japan, hence increasing the inflation rate. The
inflation rate in Japan was last reported at -0.6 percent in September of 2010. From
1971 until 2010, the average inflation rate in Japan was 2.97 percent reaching an
historical high of 24.90 percent in February of 1974 and a record low of -2.50 percent
in October of 2009.
Interest Rates:
Since the late 1980s, the Bank of Japan has been driving the interest rate to
very low levels in order to spur economic growth. Short-term lending rates have
responded to this monetary relaxation and fell from 3.7% to 1.3% between 1993 and
2008. This made it profitable to borrow money in Japan in order to fund investments
in other countries. This activity, better known as yen carry trade, bears the risk of
being losing bets when the Japanese Yen appreciates against other currencies. Carry
trades have been a key determinant of the value of yen relative to other currencies.
Based on short Yen futures positions, which are used to hedge against the risk of Yen
appreciating, the total amount of Japanese Yen used in carry trades is estimated to be
around 125 trillion ($1.2 trillion).
Historically, carry trades have helped to keep the value of Yen low compared
to the US dollar and other major currencies. However, they also make the Japanese
Yen extremely sensitive to financial crises across the globe. During the Russian
financial crisis in 1998, the Yen gained 20% in two months. After the US sub prim
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Crisis the Yen rose from 124/dollar in June 2007 to 94/dollar in October 2008. The
amount of carry-trades is dependent on Japan maintaining a low interest rate relative
to other countries. In 2008, both the Federal Reserve and European Central Bank
aggressively drove down interest rates in the US and the European Union.
2.3.3 Relative Merits of Appreciation and Government Intervention
Recent continuous appreciation of the yen, the Japanese Government is
worried that the deteriorating situation in exports, the yen worries increased. Japanese
government officials began as verbal intervention, the morning of August 25, said
Naoto Kan, Japanese Prime Minister will announce the economic policy response to a
stronger yen. On the same day, Japanese Chief Cabinet Secretary Paradise Valley by
the wild Tianjia Yan and the Japanese Finance Minister were also stressed the need to
intervene in the foreign exchange market. Japanese Government officials continue to
release signals to the market, hoping to stop the yen continued upward.
Nevertheless, the yen appreciation would still go its own way. Bank of Japan
further expansionary macroeconomic policies to soften the yen stimulate the
economy. Japanese government originally planned launch in September a new round
of economic stimulus plan announced in advance. 30 August 2010 the Japanesegovernment announced plans to use the reserve fund in the annual budget of 920
billion yen, to implement new economic stimulus plan. At the same time the Bank of
Japan held an emergency meeting in the day decided to expand its supply of tools for
financing the scale of its fixed rate funding for the supply of bank operations to
expand in size from 20 trillion yen to 30 trillion yen, but the introduction of these
measures have not been able to suppress the yen continued to appreciate the
momentum.
As Japans slow economic recovery, the yen continued to appreciate further,
exacerbated by the Japanese government concerns about the economic recovery. 15th
session in Asia, Japanese Finance Ministry official intervention the yen, to prevent
excessive appreciation of the yen, the dollar surged against the yen instant hundred
points, the Japanese yen against the U.S. dollar also from September 14 to rise to 9
83.02901 January 15 85.75128, appreciated by 3.28% appreciation of the yen eased
the pressure temporarily.
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2.3.4 Conclusion
Appreciation of the yen, Japanese exports less competitive, affecting the
domestic trade sector. Japan is export-oriented countries, in order to stimulate the
economy, the first time in 6 years the Japanese government intervention in the foreign
exchange market directly to suppress the yen appreciation.
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2.4 Great Britain Pound (GBP) Against Unites States Dollar (USD)
2.4.1 Introduction
An investigation in to the prevailing issue of competitive devaluation between
the predominant currencies the Sterling, measured against the Dollar. The report will
firstly describe the Sterlings path against the Dollar for the past twelve months. Then
the report will analyse the key factors that impact the Sterling, with the use of
academic theory. Furthermore the report will then look at the implications of currency
appreciation and depreciation. Lastly it will conclude by summarising the key points
in the report.
After the Second World War; money now flows freely in a global capitalmarket economy. (FT, 2010) The price at which two currencies are in exchange, is
known as the exchange rate. Moreover exchange rates between two currencies are
known as nominal exchange rates and the real effective exchange rate. It takes in to
account the inflation rate differentials and enables the ability to calculate the degree of
which the currency is valued and undervalued over time. (Begg et al, 2003)
2.4.2 GBP Sterling Against the US Dollar Analysis
Figure 2.4.1:
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UK Pound Sterling vs US Dollar Forex Chart, (Forex, 2010)
Figure 2.4.1, highlights that in the past year the Sterling against the US Dollar
has in recent months been depreciating. There is a downward trend of the Sterling
measured against the US Dollar.
Figure 2.4.2: Percentage Change of the Sterling Against the Dollar
Percentage Change of the Sterling Against the Dollar, (Currency Chart, 2010)
% Change
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The overall trend is steady although there has been a quarterly decrease in the
value of the Pound against the Dollar in the last quarter. The Sterling against the
Dollar has been on a steady decreasing slope downwards. The percentage change on
average is negative thus conveying currency depreciation.
2.4.3 Factors which have changed the value of the GDP Sterling against the US
Dollar in relation to theories
Firstly the changes in demand and supply change the currency value, for
example when demand exceeds supply of currency then the currency is more valuable
vice versa.
Secondly UK consumers may prefer to save, in order to increase wealth, thusthis will change the Sterlings value. Also it is evident that there is a problem of
unemployment in the UK (The Economist, 2010), therefore this will mean that the
value of the currency decreases and GDP goes down. Moreover the interest rate is low
in the UK at present thus the demand for currency is falling and due to an increase in
speculative demand for Sterling. (Bank of England, 2010)
In continuation for both the UK and the U.S.A exchange rates are free floating,
meaning that the laws of supply and demand determine the foreign exchange market.
In this analysis e denotes the exchange rate, which is measured in Dollars per pound.
e=/$ (1)
Here the exchange rate is the inverse of the pound per Dollar. So when the
exchange rate depreciates this means e rises, thus meaning that the relative price of
imports grow and domestic goods are less expensive. Therefore meaning that exports
from the UK are worth less and imports are more expensive from the U.S.A. This
depreciation leads to an increase in net exports as demand arises for domestic goods
(exports) x. (Blanchard et al, 1997)
X(e)=K+Ke (2)
Furthermore there are many economic theories in relation to the exchange rate.
The purchasing power theory puts forward that the exchange rate is determined by the
difference in price level between the countries, in order to maintain constant terms oftrade. Therefore the absolute purchasing power parity is,
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e=p/p* (3)
This implies that when p* or p change, then e differs to maintain a fixed
value1. Meaning that a product selling for p* in the U.S.A will sell for ep* in the UK.
Therefore if ep*>p then no one will purchase the US goods. Although if ep*
0) which
means a Sterling depreciation is due to the rise in domestic prices to those in the
U.S.A. (Lopez et al,2007) In continuation (Fisher,1930, in Hatemi, 2009) highlights
the relationship between the purchasing power of money and the nominal interest rate,
measured by the inflation rate. The response of the nominal interest rate to the
inflation rate is the Fisher effect. In addition Fisher(1930) argues that the real interest
rate is not affected by the changes in the anticipated inflation rate as this is projected
in the nominal interest rate.If the real interest rate is held steady then the nominal
interest rate responds in line with the inflation rate according to the Fisher effect.
Therefore the international Fisher effect theory portrays that the interest rate
differentials between the UK and the U.S.A should be in align with their expected
inflation rate, which then adjusts the exchange rate.
Another theory is the interest rate parity theory of exchange rates. This
highlights that exchange rates change due to changes in the interest rate in the short
run. Therefore this theory highlights that the interest rate is an important factor which
affects the exchange rate. (Baum and Chakraborty, 2010)
2.4.4 Implications of Currency Appreciation And Depreciation
Britain devalued the pound in 1967 because of the tremendous deficits on the
balance of payments due to ineffective government policies. This meant that the
Sterling was cheaper to buy, hence exports lower in price, this way the demand for
exports increased and imports decreased improving the trade balance. (The
1R=ep*/p, R=1 and e is equal to e=p/p*.
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Economist, 2010) The exchange rate changes in diagram 1 and this affects the
international competitiveness of a country, in this case the UK.
Figure 2.4.3:The Floating Exchange Rate Regime: The Case of Currency
Depreciation
Here we assume that the Sterling and the Dollar are traded on the FOREX
market, here the domestic interest rate falls relative to the interest rate on the Dollar.
This then leads to a fall in demand for Sterling, moving from D1 to D2, thus causing
an outflow of capital to the U.S. Therefore the investors convert their assets in to the
Dollar, thus the supply of Sterling increases hence supply moves from S1 to S2
resulting in depreciation. So meaning exports are more competitive and imports more
expensive.
In addition currency depreciation may lead to macroeconomic uncertainty and
domestic producers may pass on costs to consumers due to higher raw material prices.
Which can lead to cost push inflation, thus a wage spiral occurs and real incomes fall.
Also there may be loss of production and output meaning the economy is allocatively
and productively inefficient, hence leading to unemployment and a decline in
economic growth.
Also depreciation affects businesses as it deters investment in the UK, hence it
can also lead to cost push inflation in the long run hence making goods uncompetitive.
As exports are cheaper in the US Dollar and imports are expensive in pounds.Although if goods are imported which have inelastic demand in the UK, then
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1068 words
2.5 Malaysia Ringgit (MYR) Against United States Dollar (USD)
2.5.1 Introduction
As for this section, it is divided to three parts. First, a brief description on the
path of the currency wars between the MYR and USD in the past twelve months.
Second, some key factors that contributed towards the fluctuation of the MYR as
shown in Figure 5.1 and Table 5.1 and some explanations on the relationship between
these factors with exchange rates theories. Finally, the advantages acquired when the
MYR appreciated in terms of economics and business implication in Malaysia.
2.5.2 Path of The MYR in The Past 12 Months
According to Figure 5.1: USD/MYR 365 Day History (US Dollar (USD) to
Malaysian Ringgit (MYR) Exchange Rates History, 2010), in the last 1 year from 3 rd
of November 2009 until 2ndof November 2010 the MYR has appreciated against the
USD. In other words, in 3rd of November 2009 MYR currency holders will need to
spend more MYR in order to purchase the USD. As compare to in 2 ndof November
2010, they need lesser MYR to purchase the USD. A simple example to illustrate thisis by looking at the value in those two dates. According to the figures acquired from
Table 5.1: Table of 1 US Dollar to Malaysian Ringgit Exchange Rate (US Dollar
(USD) to Malaysian Ringgit (MYR) Exchange Rates History, 2010), in 3rd of
November 2009 we need 3.4366 MYR to buy 1 USD. As for the more recent date, we
need 3.0866 MYR to buy 1 USD.
This shows that the strength of the MYR is greater now as compare to the past
1 year. A simple calculation will give us the percentage of change for the year ending
2nd of November 2010 to the past 1 year. Take 3.4366 and subtract 3.0866. Thats
0.35. Then divide 0.35 by 3.4366. Thats 0.1018. Now multiple by 100 and it gives us
10.18%. To further explain, the MYR has appreciated by 10.18% from 3 rd of
November 2009 to 2ndof November 2010.
2.5.3 Key Factors That Contributed Towards Fluctuation
There are many factors that influence the fluctuation of a currency. The mostnotable factor is the economic factors of a given country. In this case, Malaysia. One
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of such economic factors is the trade deficit or surpluses. (Factors That Are
Influencing The Foreign Exchange (Forex) Market, 2010) In the past few years the
US has been suffering from trade deficit. In addition, Malaysia has managed to reduce
its trade deficit by signing the free trade agreements (FTAs) with Bangladesh and
India.
This agreement gives Malaysia a chance to export more to these two countries
and vice versa because it mainly constitutes three goals which are; increase trade
between member countries, reducing product prices and improve political bond
between countries. (FTA with India and Malaysia, 2010) The first FTA affects the
demand and supply of currency for all three countries. This is related to an exchange
rate theory; the monetary approach within the asset-approach models. The exchange
rate is determine by money demand and supply between the countries. (Chapter 18
Exchange Rate Theories, 2010) The more goods are exported the more MYR is
demanded. Thus, the MYR appreciated.
Another economical factor is increase or decrease in price inflation. In the past
one year the inflation rate in Malaysia have drastically lowered. According to CIA
World Factbook cited in Malaysia Consumer Rate (consumer prices) (2010), the
inflation rate for consumer prices in 2009 was 5.4% but in early 2010 it was 0.4%
(refer to Table 5.2: Malaysia Inflation Rate (consumer prices)). From this source it
shows the inflation rate is significantly lowered. Since low inflation rate increases the
purchasing power within a country, Malaysians will tend to spent more within the
country which leads to lower import entering the country. Therefore, the MYR
appreciated. As for this factor it also related to the monetary approach theory.
Another factor that contributed towards the appreciation of a currency is the
currency crisis (Foreign Exchange MarketForex 2009, 2010). The crisis is referring
to USs inability to clear its external debt. For example, China was the world largest
US reserves holder with a figure of 2 trillion USD. Another example is the US keep
printing money to buy bonds. By doing so, the USD will not just fall considerably in
the long run but will also lead to an inflation in bond price. (Pritchard, 2009) To
further explain, everyone knows that the US was the world leading importer. All these
explanations are what justified US gross external debt of 13,984,097 million USD as
of 30 June 2010 (U.S. Gross External Debt, 2010). With such currency crisis took
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place, USD further depreciation is imminent. As a result it will affect all other
currencies in the world to appreciate against the USD.
2.5.4 Advantages of MYR Appreciation
In the case where MYR appreciates there are a number of advantageous merits
to Malaysia. One of the obvious reason is it help balance the payments adjustment.
One of the reasons why MYR appreciates is because Malaysia has trade surpluses.
This is because exports will be greater than imports meaning the supply of MYR on
the foreign exchange will be decreasing as importers buy MYR to pay the imports.
The effect of appreciation will make Malaysian exports more expensive and imports
cheaper, thus lowering demand for Malaysian goods and increase demand in overseas
goods. Therefore, dealing with the balance of payments or the trade surpluses or
deficit problem. (The advantages and disadvantages of floating exchange rates, 2010)
In addition, appreciation of a currency may help lower gross external debt.
Malaysia is now able to pay back twice as easy because its MYR value is higher than
before. Since the MYR is not a fixed rate and is currently appreciating, Malaysia do
not need to but and hold a large amount of foreign currency such as the USD in order
to prepare for a time when they have to defend that fixed rate. By eliminating the needfor foreign exchange reserves, Malaysia does not have to worry about that extra
expenditure. (The advantages and disadvantages of floating exchange rates, 2010)
2.5.5 Conclusion
In conclusion, it is clear that the MYR have appreciated against the USD. The
discussion justified that reducing trade deficit, reduce in consumer price inflation and
USs massive gross external debt are some of the many factors that contributed to
MYR appreciation. Advantages of appreciation to Malaysia have also been assessed
where now it is certain as to how it benefited the county. The government may
intervene in fluctuation of the currency through the central bank. In order to stabilise
the MYR, the Malaysian government may use Bank Negara to increase or decrease
the interest rates. This will promote or discourage foreign direct investments (FDIs).
(Zehra, 2010)
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Figure 2.5.1:
USD/MYR 365 Day History, (exchangerates.org.uk, 2010)
Figure 2.5.2:
Table of 1 US Dollar to Malaysian Ringgit Exchange Rate: Updated: 03/11/10 00:13
DateUS
Dollar
Malaysian
RinggitLink
Tuesday 2
November 20101 USD = 3.0866 MYR USD MYR rate for 02/11/2010
Saturday 2 October
20101 USD = 3.0758 MYR USD MYR rate for 02/10/2010
http://www.exchangerates.org.uk/USD-MYR-02_11_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_11_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_10_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_10_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_10_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_11_2010-exchange-rate-history.html -
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Thursday 2
September 20101 USD = 3.1254 MYR USD MYR rate for 02/09/2010
Monday 2 August
2010 1 USD = 3.1593 MYR USD MYR rate for 02/08/2010
Friday 2 July 2010 1 USD = 3.2329 MYR USD MYR rate for 02/07/2010
Wednesday 2 June
20101 USD = 3.2827 MYR USD MYR rate for 02/06/2010
Sunday 2 May
20101 USD = 3.1901 MYR USD MYR rate for 02/05/2010
Friday 2 April 2010 1 USD = 3.2462 MYR USD MYR rate for 02/04/2010
Tuesday 2 March
20101 USD = 3.3828 MYR USD MYR rate for 02/03/2010
Tuesday 2
February 20101 USD = 3.4181 MYR USD MYR rate for 02/02/2010
Saturday 2 January
20101 USD = 3.4222 MYR USD MYR rate for 02/01/2010
Wednesday 2
December 20091 USD = 3.3771 MYR USD MYR rate for 02/12/2009
Tuesday 3
November 20091 USD = 3.4366 MYR USD MYR rate for 03/11/2009
Monday 2
November 20091 USD = 3.4299 MYR USD MYR rate for 02/11/2009
Minimum: 3.0645 MYR: 15 Oct 2010, Maximum: 3.5588 MYR: 12 Oct 2009, Average: 3.2782 MYR: 1 year
Table of 1 US Dollar to Malaysian Ringgit Exchange Rate, (exchangerates.org.uk, 2010)
http://www.exchangerates.org.uk/USD-MYR-02_09_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_09_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_08_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_08_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_07_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_07_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_06_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_06_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_05_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_05_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_04_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_04_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_03_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_03_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_02_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_02_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_01_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_01_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_12_2009-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_12_2009-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-03_11_2009-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-03_11_2009-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_11_2009-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_11_2009-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_11_2009-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-03_11_2009-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_12_2009-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_01_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_02_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_03_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_04_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_05_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_06_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_07_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_08_2010-exchange-rate-history.htmlhttp://www.exchangerates.org.uk/USD-MYR-02_09_2010-exchange-rate-history.html -
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Figure 2.5.3:
Malaysia Infation Rate (consumer prices)
Year Inflation rate (consumerprices)
Rank PercentChange
Date ofInformation
2003 1.90 % 168 2002 est.
2004 1.10 % 189 -42.11 % 2003 est.
2005 1.30 % 31 18.18 % 2004 est.
2006 3.00 % 90 130.77 % 2005 est.
2007 3.80 % 111 26.67 % 2006 est.
2008 2.00 % 40 -47.37 % 2007 est.
2009 5.40 % 89 170.00 % 2008 est.
2010 .40 % 31 -92.59 % 2009 est.
Malaysia Inflation Rate (consumer prices), (indexmundi.com, 2010)
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2.6 Germany Euro (EUR) Against United States Dollar (USD)
2.6.1 Introduction
The aim of the following chapter is to investigate the impact of exchange rates
fluctuation currency wars on the German economy and its currency, the euro. As
the euro is also used by other countries, and as the German government does not have
a control over its national currency any longer, the discussion has to include the
European Union and the European Central Bank.
2.6.2 EUR/USD Exchange Rate Analysis
The graphs below, which visualise the value of the euro against the dollar and
the yuan, are strikingly similar.
Figure 2.6.1 EUR/USD Exchange Rate Graph
EUR/USD Exchange Rate Graph, (Onet, 2010)
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Figure 2.6.2 EUR/CNY Exchange Rate Graph
EUR/CNY Exchange Rate Graph, (Exchangerates, 2010a)
The American policy of quantitative easing was gradually appreciating the
euro. Because the yuan is pegged to the dollar, when Americans apply quantitative
easing, the value of the euro appreciates against both the dollar and the yuan. This
makes German export less competitive in the largest global markets. The value off the
euro against the dollar was steadily depreciating between November 2009 and June
2010. It was powered by the unfolding European debt crisis. Then, however, the trend
changed and the value of the euro against the dollar has fallen by 20% since June
2010. Hopefully for the Germans, the Japanese currency, the yen, had been strong fora long time, helping the German economy to recover (Satyajit, 2010). Although the
value of the EU currency against the yen and the Swiss franc had been falling for
many months, also in these cases the exchange rates have either stabilised or
weakened the euro (Exchangerates, 2010b).
The main concern of the countries whose currencies appreciate is export
competitiveness. Being the third largest exporter in the world (CIA, 2010), Germany
is especially exposed to that risk. Although German export is growing now, there are
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signs of slowing down due to the falling dollar. Exports had dropped in July and
August 2010. German exporters are afraid that a new wave of QE in the US will entail
a vicious spiral of devaluation, which would hit Europe the most. German export is
fueled by constantly developing countries, most notably China, but questions are
being raised if the currency skirmishes will not provoke protectionism, which would
close developing markets for German companies (Schafer, 2010). The situation does
not seem to be improving. Industrial orders tumbled by 4% in September compared
with the previous month (Atkins, 2010).
It should be stressed here that the situation of Germany is more complex than
that of the US or China and the consequences of currency wars on the German
economy and policy may be troublesome in a very long run. Germany has been the
engine of European economy since the end of the Second World War. It is the most
populated country in Europe (excluding Russia) and its GDP is far bigger than that of
UK, France or Italy, scoring as the forth one in world ranks (Worldbank, 2010). In
reality, the euro is much more a German legal tender than French, British or any
other. Suffice it to say that the German mark, which was replaced by the euro, was the
second global reserve currency as early as at the beginning of the nineties (Lewis,
2001: 136). As Germany is tied to EU law and institutions, and often bears the highestresponsibility for the UEs well-being,2 it is also affected by other EU members
performance and does not have complete freedom in terms of its monetary policy. It
would not be an exaggeration to say that the fate of Germany is dependent on the EU
and it is in the Germans interest to think in terms of the whole European Union.
It follows from previous consideration, that if currency wars worsen EUs
situation, they will also harm Germany. First, Germany and other countries (including
non-EU states, like Norway and Switzerland) transfer huge amounts of money to the
newly admitted EU states. The majority of this money has to be spent on
infrastructure and environmental solutions. When the prices of American and Chinese
goods fall, as a result of making the dollar and the yuan artificially weak, these new
UE members (Poland, Romania, etc.) will order goods from outside the European
Union, depriving French, British, and especially Germany companies of their
revenues. Secondly, currency wars destibilise currency markets, which entail
1As could be observed during the Greek crisis.
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problems for the countries that are planning to adopt the euro. To do that, they have to
fulfill rigorous requirements.3 If they encounter problems with that, then either the
expansion of the Eurozone will be hampered or Germany will have to contribute
again.4
At the same time, a lot of European, and not only European countries, opted
for QE or other forms of regulating money supply. Britain employed quantitative
easing already in 2009 (Giles, 2009). Recently also Switzerland attempted to weaken
its currency (Hotten, 2010). To take the argument further, countries like Russia or
Poland, important trade partners and investment sites for Germany, are conscious
about the value of their currencies and ready to intervene (Evans-Pritchard, 2010).
This complicates both economic and political relations between Germany and its
partners.
The European Central Bank responded differently to the spread of QE policy
than many other countries did. It resigned from injecting money into the banking
sector and focused on tightening monetary policy. This has already led to higher
interest rates, which can encourage foreign capital to invest in Germany and other
Eurozone members. This can create a risk of stock market bubbles (Tilford, 2010).
2.6.3 Conclusion
The currency wars brought competition to internal EU markets. Germany, and
other Eurozone countries, had to adjust their policy to the changing market situation.
The European Central Bank did not follow other central banks and did not embark on
increasing money supply through QE, and it is praiseworthy. By doing so, the EBC
seems to be far-sighted, and there is unlikely prospect off excessive inflation in the
Eurozone. However, as the Americans are not going to resign from their policy,
Germany is definitely losing its export chances. The abundant orders from developing
countries are optimistic, but they may also help German managers forget about the
losses they suffer in international markets. Finally, what is good for Germany is not
necessarily good for weaker Eurozone members.
1048 words
2Known as the euro convergence criteria or Maastricht criteria.
3Such intervention would, most likely, be conducted with the use of European institutions, like the ECB.
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3.0 Conclusion
In final conclusion, it is clear that competitive devaluation was referring to an
attempt to devalue the currency to serve a specific purpose. Although in the current
economy, most currencies around the world are appreciating against the USD but this
does not mean that the implications of depreciation should be neglected. After
assessing the six countries it is found that the implications of competitive devaluation
can be summarised into four subtopics. They are the interest rate, inflation, economic
growth and trade balance. Actually, all these subtopics are closely related to each
other. Competitive devaluation will have implication on interest rates due to its direct
connection. When the value of a currency drops, the government will increase the
interest rates through the central bank. By doing so, this will encourage more foreign
direct investment, borrowings and exports.
Higher exports and lower imports will balance the trade deficit problem.
Furthermore, if the banks issue more loans, the returns as applied to the interest rates
will be more profitable. These will ensure economic growth in the long run especially
with the presents of FDIs. Devaluation of a currency can also affect consumer price as
it affects interest rates. When a currency is devalued, the people will need to spend
more on purchasing import products. This shows an increase in inflation rate for
overseas product as well as bond price and foreign exchange reserves price. From here
it is concluded that competitive devaluation will have many implications. All these
implications consist of significant effects on the global and domestic economy.
256 words
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