1

Table of Contents

INTRODUCTION:........................................................................................................................................4

1-USA Section...............................................................................................................................................6

1.1 Introduction..........................................................................................................................................7

1.2 Key Factors..........................................................................................................................................9

1.3 Merits of appreciation and depreciation............................................................................................11

1.4 Conclusion.........................................................................................................................................15

2-Japan Section............................................................................................................................................16

2.1-Introduction.......................................................................................................................................17

2.2- Key Factors.......................................................................................................................................18

2.3- Merits of appreciation and depreciation...........................................................................................24

2.4- Conclusion........................................................................................................................................27

3-China Section............................................................................................................................................28

3.1 Introduction........................................................................................................................................29

3.2 Key Factors........................................................................................................................................29

3.3Merits of appreciation and depriciation..............................................................................................33

3.6 Conclusion.........................................................................................................................................36

4-Turkey Section..........................................................................................................................................37

4.1 Introduction:.......................................................................................................................................38

4.2 Key Factors........................................................................................................................................39

4.3 Merits of appreciation and depriciation.............................................................................................43

4.6 Conclusion:........................................................................................................................................47

5-UK Section...............................................................................................................................................37

5.1 Introduction........................................................................................................................................38

5.2 Key Factors........................................................................................................................................39

5.3 Merits of appreciation and depriciation.............................................................................................43

4.6 Conclusion.........................................................................................................................................47

2

CONCLUSION:...........................................................................................................................................48

REFERENCES:...........................................................................................................................................49

3

Introduction

In recent months the world economy has been on a war footing, at least theoretically. This

has been as a result of government interventions in order to gain competitive advantage by

influencing the value of their currencies. Trade surplus countries have initiated “currency

wars” 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 Yuan

artificially 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 to

be able to export more commodities to the global market. In response, trade deficit

countries such as the United States and United Kingdom have introduced monetary

policies to devalue their currencies in order to be able to compete in the export market.

As a result of the competitive devaluation of currencies between USA and China (at

present, the two world leading economies), the currencies of other world economies such as

Japan, Britain and Turkey are being affected. This report will discuss the key factors that

have contributed to the changing value of currencies and the relative merits of currency

appreciation/depreciation. The US Dollar was used as the base currency when the path of

the currencies of Japan, China, Turkey and UK were being observed over a 12 month

period, while the path of the US dollar was observed against the euro for the same period

as above.

The first section of this report will examine the path of the US dollar against the euro. In

addition the causes of the fluctuation of the US dollar against the euro will be related to

exchange rate theories.

The second section is going to talk about the government interventions undertaken by

Japan and USA through the use of monetary policies to gain an advantage on the export

4

market. Hit will also look at the trend of the Japanese Yen against the US dollar and the

economic implications of its appreciation.

The third section will force on the changing of Chinese RMB currency and the forces from

US to push RMB appreciation.

The fourth section of the report will examine the relationship between the Turkish Lira

and the US Dollar. Also, the implications of the revaluation of the lira by the government

will be discussed.

The final section will examine the relationship between the British Pound and the US

dollar. In addition, the key factors that affect the British currency will be examined.

5

6

1-THE US DOLLAR AGAINST THE EURO

Omotayo Atunde

10244643

Word Count: 1,098

1.1 INTRODUCTION

The United States has the world’s largest economy and the U.S dollar is the most traded currency

in 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 path

of the US dollar against the euro for a 12 month period. The possible reasons for the fluctuation

between these currencies will be examined and related to exchange rate theories. The possible

implications of the intervention of the US government in devaluating the US dollar will also be

stated.

Table 1 below shows how the United States dollars moved against the Euro for a period of 12

months.

Table 1.0: Exchange Rates of the U.S Dollar against the Euro for a 12 Month Period.

Source: Adapted from Yahoo

Finance, 2010

7

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

Figure 1.0: Volume of world merchandise exports, 1965- 2009 (Annual percentage change)

Source: WTO International Trade Statistics, 2010

Figure 1.0 above show that there was a sharp decline in world merchandise exports in 2009 as a

result 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 Period

Source: Yahoo Finance, 2010

8

According to figure 1.1 above the value of the dollar hit an all time low in the 12 months period

relative to the euro in the period of November 2009 (Yahoo Finance, 2010). It can be noticed

further in figure 1.1 that the US dollar staged a recovery against the Euro around the period of

December 2009 and maintained an increase through January to May 2010. Although the US

dollar 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 US

dollar tried to stage a recovery around the period of August, it recorded a dramatic downturn

against 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 to

embark on “quantitative easing” (Stewart, 2009). The U.S government proposed to buy U.S

government debt and bonds to the tune of $1trillion dollars (Stewart, 2009). Interest rates were

lowered at 0-0.25% with the expectation that people in the United States would spend more in

the 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 fell

sharply against the euro (Stewart, 2009). On this basis it may be inferred that investors opted to

invest overseas to gain a higher return on their investment in other countries with high interest

rates , 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 this

reason.

The recovery of the dollar that was initiated in the period of December 2009 through May 2010

can be related to the recovery of the United States economy during that period (Nohara and

9

Nicholas, 2009). Although Interest rates were kept “extremely low” employment and consumer

spending trends increased the circulation of money in the economy which improved the US

economy 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 downturn

because its treasuries are backed by the US government (Yousuf, 2010). This attracted investors

from the euro zone around the period of June 2010, following the fear of investors that the

private – 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 a

high demand of the U.S dollar by the Euro Zone could have strengthened the US dollar against

the euro.

The downturn of the dollar around the period of September through October 2010 in fig 1.1 as

above can be related to the speculation that the US government was about to proceed on another

round 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 (Aldrick

and Blackden, 2010).

The depreciation of the dollar based on investors seeking higher interest rates abroad may be

related to International Fisher Effect which suggests that the value of currencies would change

based 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 inflation

of goods and services in the U.S may cause the US dollar to depreciate in value (The Economist,

2010).

10

Although quantitative easing has resulted in the depreciation of the dollar, the 12 month period

examined is too short to conclude as to whether the fluctuation of the US dollar can be

underpinned by the exchange rate theories examined. This is because it is very difficult to

accurately determine the forces that affect exchange rates (Hill, 2007).

1.3Merits of appreciation and depreciation

Businesses can take the advantage of a weak dollar to compete internationally by making their

exports cheaper. As a result manufacturing in the U.S will increase and jobs in the United States

will also increase, which is good for the economy. In addition increased exports will help in

reducing 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).

CONCLUSION

This section of this report has examined how the US dollar fluctuated against the euro for the

period of 12months. It examined the possible reasons for these fluctuations and related them to

exchange rate theories. Based on the evidence explored above “quantitative easing” has been a

monetary 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 international

market which will consequently increase jobs especially in manufacturing.

11

2-THE JAPANESE YEN AGAINST THE US DOLLAREmmanuel Adu-Boakye

10245255Word Count: 1,104

Introduction:

This section is going to focus on the competitive devaluation of the Japanese Yen and the US

dollar; the government interventions by devaluing their national currencies in order to gain

competitive 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 and

in 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 of

money. Finally, I will look at the economic implications of the “currency war” on Japan’s

economy.

Figure 2.1

Trend of the Japanese Yen against the US dollar

Sourced from financial times 2010

The graph shows that the yen hit a 14year high against the dollar in November 2009 at 84.83

since it hit its highest of 79.75 in April 1995 New York Times (2010) but the government of

Japan intervened verbally and saw the Yen weaken against the dollar in January 2010. The bank

of japan unveiled a credit steps in December and January when the then finance minister Naoto

Kan (now prime minister), urged the bank to do more to combat deflation. It can be realised that

12

the yen rose against the dollar again but in June, the Yen fell against the dollar. The Yen declined

to the lowest level 94.98 in two weeks against the dollar after Prime Minister Hatoyama tendered

his resignation. A senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s

second-largest banking group, Masahide Tanaka said “If Kan, who is an advocate for a weak

yen, replaces Hatoyama, investors’ expectations will strengthen for the yen to decline.” Business

Week (2010). The rise from this point however is accounted for by the Euro crisis which caused

investors to look for a safe haven in Japan since USA investors lack faith in their economy as

well Smith (2010). This pushed the yen up to 83.07. In September, Japan’s finance ministry

intervened in the markets for the first time in more than six years bringing it down to 85.85 but

the currency has been creeping back towards its pre-intervention 15-year highs (financial times

2010). One of the major reasons behind this was the announcement of quantitative easing by the

USA government which is a de facto attempt to weaken the dollar. The percentage change in the

yen over the year has been -10.62% meaning that for instance, if I had bought one share at

90.34JPY in November last year, I would have made a loss of -9.59JPY by now with the yen at

80.63 (02/11/2010).

Key Factors:

Theories of exchange rate movements seem to agree that three factors namely, the country’s

price inflation, interest rates and market psychology have key impact on movements in a

country’s currency. Hill (2007)

13

Figure 2.2

Source: Google online images.

The circular flow of income in japan has many loop holes which have caused the Yen to

appreciate. For the currency of a country to strengthen, all factors being equal, the domestic

growth rate must be high Dicken (2010). In the case of japan however even though the growth

rate 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 country's 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 make

monetary policies work effectively in a deflationary trap Krugman P. (2010). In deflation, people

refuse to take loans no matter how low interest rates might be. Life expectancy is 83years in

Japan World Bank data base (2009), there are more elderly people in the economy so the

government spends more on retirement benefits. With reduction in savings, money leaving the

firms is not going back into the firms.

Also, with low interest rates, Japanese investors invest in overseas assets more than in domestic

ones. With the rise of the yen, investors are now selling their foreign currencies in order to be

14

able to repay their yen loans. This has brought about an increase in the demand for yen and

consequently an increase.

Another factor is the fact that investors shifted to Japan as a safe haven in the Euro crisis. A

report in the China daily (2010) confirms this shift as china made a record investment about $6

billion in japan bonds in the first quarter of this year. Again with Japan’s advantage faded in the

carry trade and rising yen, foreign debtors are in demand of the yen to pay their loans BBC

(2010).

Business and economic implications

The appreciation in the value of the yen is not good for Japanese exporters. Exports make a huge

percentage of the Japanese economy. Analysts say the country's export-led recovery appears to

be 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 to

import commodities for relatively cheaper costs. Notwithstanding these benefits to the

consumers, this again goes a long way to hurt the Infant and local industries in Japan because

they 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 surplus

which is indirectly making the currency appreciate to a balance and eventually get the yen to its

original position.

Conclusion

The path of the Yen against the US dollar has been explained and the various interventions have

been outlined mentioning their effects on the economy as well. It was realised that all the

interventions of the Japanese Government in the past have yielded positive results and pushed

the Yen down in order for exports to be competitive. Even though recent interventions have not

been successful, it is expected that the Yen will fall in value again with plans on government

intervention in discussion. Meanwhile, the appreciation of the yen should not have such an

adverse 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 yen 15

presupposes that imports of these raw materials are cheaper for Japanese home-based

manufacturers. Again, manufacturers are benefiting from the low cost of labour and other

resources available in the country due to the deflation situation. Japanese exports have goodwill

and will still compete on the markets even at their high prices.

16

17

3-THE CHINESE RMB AGAINST THE US DOLLAR

Hongyuan Cao

6153258

Word Count: 1,096

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 path

of the currency against the US dollars over the past 12 months. After that, the second part will

explain the key factors that have contributed to the changing value of the currency and comment

on the relationship of these factors to exchange rate theories. The final part is the discussion of

relative merits of RMB appreciation or depreciation.

Figure 1 represents the exchange rate changing between RMB and USD in last 12 months. The

exact exchange rate of 1 USD to RMB was 6.64320 on 17th of October, very close to the lowest

point in last 52 weeks which is 6.64190. According to BBC Business, it is 6.8281 RMB to 1

USD in the November of 2009. It means in last 12 months, RMB has appreciated 2.71%, it was a

dramatically change in the foreign exchange rate for both counties. The factors of this change

will be discussed in next past of this section. Base on the figure 1, the dramatically changing was

happened after June of 2010, it is kept very stable before June. Moreover, June of 2010 is not the

start of RMB’s appreciation against USD. According to Worldbank Data, the appreciation of

RMB against USD is start from 2004, the average rate against USD is 8.3 and it is appreciate to

6.8 in 2009, approximately 18%.

Figure 1: United States Dollar-Chinese RMB

18

Source from BBC Business 2010

The following part will explain some factors push this appreciation. Fundamentally, the changing

of exchange rate is base on the relationship of supply and demand; moreover, the inflation rates

and 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 than

exporting) creates pressures that may result in the depreciation of the country’s currency on the

foreign exchange market. However, Chinese General Administration of customs noted that

Chinese trade surplus of 16.9 $ billion (Macartney, 2010). Interest rate is another factor of

exchange rate. According to Carbaugh (2000), the increasing of interest rate (relative to foreign

nations) is an important factor of increasing of exchange rate. Chinese interest rate is 5.31, but

US 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 should

stimulate the economy (Financial Times, 2010). Approximately 53 per cent of American think

free trade has been bad for the country (Luce, 2010). According to the report of Wall Street

Journal in October, U.S. steps up pressure on China. Because base on the US-China Business

Council‘s statistics report, US is China’s top export destination in the world, which account

18.37% of China’s total export to the world. Furthermore the US balance in the trade with China

was -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 GDP

growth for US in 2011 is 2.8%, however, only 6months later, the forecasting is 1.7%. This

forecasting push US government tends to reduce the unbalance of payment with China to raise

the domestic demand.

The possible tariff barrier set by US is another factor. Chinese government want keep RMB

stable to protect their export, Wen Jiabao said ‘an unstable Yuan put the global economy in peril’ 19

(Economist, 2010), because export is a significant part in Chinese economic. In 2009, Chinese

export 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% on

imports of Chinese-made tyres (BBC NEWS, 2009). Moreover, according to Tyson (2010), US

senator Charles Schumer said in June, he plans to advance trade-sections legislation. This could

dramatically influence China’s economic and unemployment rate even the stable of political

system.

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), the

undervalued currency is a tariff barrier by other means. As the report mentioned, export is a

significant part of China’s economic. Therefore, the depreciation of RMB could increase the

unbalance of payment between China and US. China could take the advantage of foreign

currency (Carbaugh, 2000) to export more product to US since US is still one of the biggest

market in the world even is much smaller than China. At the same time, it could also reduce the

import to China, because the price of foreign products will be more expensive. It could increase

the demand for domestic products and this demand is internal, stable and not dependence on any

other 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. For

instance, according to WorldBank database, the energy import of total energy use is dramatically

increasing in past few years (from -0.2% in 2001 to 7.2% in 2007). The appreciation could

reduce the import cost for these energy organizations. Also it could benefit to Chinese oversea

student in US. By 2020, China hopes to play host to 300,000 international students in the world

and 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.

Conclusion20

The political forces from US is the major factor of the appreciation of RMB, and both of

appreciation and depreciation could bring advantage to different industries in China and

depreciation that has served China so well. However, China’s government should not keep their

currency 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 limitless

capacity to print dollars (Wolf, 2010). But China also has some unique weapons at its disposal

which is great capacity to neutralize the impact on the domestic economy (Flanders, 2010). One

of the most powerful trends to emerge from the currency war is a renewed effort to reduce

economic dependence on western economies (Dyer, 2010). How to move their economic

structure to a stable and independence form (Dyer, 2010), this structural reform is an essential

issue for China’s government.

21

22

4-THE TURKISH LIRA AGAINST THE US DOLLAR

Mustafa Mert Dikmen

10252709

Word Count: 1,096

THE TURKISH CURRENCY AGAINST US DOLLAR

This 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 are

contributing to the changing value of TL against the U.S. dollar and the relative merits of

currency appreciation and depreciation.

Examining trade relationships amongst countries along with their government policies, growth

rates and political stability will be contributive when trying to make sense of their mutually

interdependent currencies. However, in most cases it is quite difficult to tell whether or not a

stronger currency or a weaker currency is favourable.

Figure 4.1:TURKISH CURRENCY AGAINST THE US DOLLAR IN THE PREVIOUS 12

MONTHS

The graph above illustrates the trend of the US Dollar against the Turkish Lira in a one-year

period. On October 2009, 0.68 USD was equal to one Turkish Lira. Starting from October the

23

exchange rate between two countries fluctuated around 0.67 until the USD reached a plateau on

June 2010 of about 0.62 USD. After the Turkish Lira’s big devaluation on June 2010, the TL

started to revaluate very rapidly and reached the level of 0.71 against USD. From October 2009

to 2010 the value of the Turkish Lira has increased by 4.41% against the USD.

KEY FACTORS CONTRIBUTING TO THE CHANGING VALUE OF TURKISH LIRA

Economic growth is one the main key factors that contributes to the changing value of the

currency in Turkey. If the reason of the economic growth in one country is basically domestic

consumption 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 foreign

investment and exports, the currency will appreciate. In the first quarter of 2010, the Turkish

GDP has expanded by 11.7% on an annual basis which was the second fastest expansion in the

world after China. In the same period the growth took place, Turkish currency depreciated from

0.69 to 0.64 TL against the US dollar. Furthermore, in the second quarter of 2010 the Turkish

currency appreciated while the GDP reduced by 1.4% to 10.3%. Despite the record economic

growth, the value of the TL did not appreciate against the USD at all, which indicates that the

economic growth in Turkey cannot be related to foreign investments and exports. In fact, the

data collected from Hürriyet Daily News (2010) in June suggests that trade deficit has widened

to 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 political

stability. According to The Economist (2010), after the referendum was held on September 12 th

2010 “Turkey’s growing influence has fostered a new national confidence that has replaced

decades of paranoia and prickliness.” The new politically stabilized Turkey has continued to

attract even more foreign investors in the Turkish economy in the previous year. Since FDI

requires purchase of the foreign currency, the demand for the TL increased. The increasing

demand of currency had a triggering effect on the Turkish currency against the USD as the USD

depreciated 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 is

used for trade with most of the countries who are in business relationships with Turkey.

24

Accordingly, the US government’s currency policy to lower the value of the dollar is expected to

expand the trade volume of Turkey. In addition, it will encourage the Turkish economy to import

even more goods than they are now. Considering Turkey is one of the only few nations that have

a trade deficit with USA, the US Commerce Secretary Gary Locke, stated his aims as to double

the US exports to Turkey (United States Department of Commerce 2010). USA’s successful

policy to devalue its currency summing up with Turkey’s politically stable position resulted in

the Turkish Lira to appreciate in U.S. dollar terms.

RELATIVE MERITS OF CURRENCY APPRECIATON/DEPRECIATON

Getting into debt causes the budget deficit to expand therefore raising the inflation rate. Turkey’s

debt was placed at the 26th spot on a list of 32 most debt-ridden countries with 266 billion dollars

of debt according to World Bulletin 2010. When the huge debt is taken into account, a stronger

currency 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 Statistical

Institute) the CPI and PPI decreased by 0.56% and 0.50% respectively in July 2010 during a

period when the TL was appreciating.

Furthermore, not only will currency appreciation lower the cost of living in the country for

citizens, 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 the

report 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. For

example, the Turkish automotive, textile and fresh fruit and vegetables exports decreased

significantly because of the strengthening Turkish currency. This decrease in the exports has led

some of the Turkish exporters to pressure the government for a weaker currency. ( Hürriyet

Daily News, 2010)

25

CONCLUSION

In conclusion, this section of the report identified the fluctuations of the Turkish Lira against the

US 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 what

implications these advantages would bring to the Turkish economy. Turkish governments recent

agreement with China (Today’s Zaman, 2010) to launch trade in TL instead of the usage of US

dollar is expected to increase Turkey’s trade volume which is an optimistic step for Turkey

considering 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 importing

nation had to buy US dollars with their home currency revaluating the USD. The findings of the

report suggest that the Turkish government and the central bank have had some influence on the

TL from the policies which they have passed regarding the growth rate, political stability and

trade.

26

27

5-THE BRITISH POUND AGAINST THE US DOLLAR

Mohammad Alkhatib

09249398

Word Count: 1,091

Introduction:

This section of the report will evaluate the causes of the fluctuation in the value of the British

pound over the US dollar and identify if these causes are in line with exchange rate theory. Also

in this section of report will be a graph that shows how The British pound has depreciated

against the US dollar over the past 12 months, identify the reasons that caused the Pound to

depreciate and explain why the changes in US dollars is important to British economy. This

section will also evaluate the merits of the appreciation and depreciation of the pound and

discuss how this will impact the economy and business operating in the British economy.

Figure 5.1 : The UK Pound Against The US Dollar

Table 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%

28

This graph shows the relationship between the British pound and US dollar over a 12 month

period. At the end of September 2009, £1 was valued $1.60. However in the middle of May

2010, £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 pound

after 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 the

political uncertainty surrounding the election result on May 6 th 2010. During this time of political

and economic uncertainty investors were wary of UK investments as they will be eagerly

awaiting the outcome of the polls. This was due to the fact that Political elections bring

uncertainty 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 government

and this may unsettle financial markets” (Torfx, 2010).

The uncertainty surrounded the political arrangement as it seemed the likely result of the

elections would be a hung parliament. Consequently, investors could not forecast economic

policies that would be set by the coalition government as the Conservative Party would now have

to 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 due

to increasing inflation rates in the U.K bringing the bank of England closer to hiking interest

rates. Also the pressure from the Federal Reserve in the United States to keep interest rates at

historically 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 important

29

After the Election the political future became clearer as investors had an insight into which

direction the new government will pursue to economic growth. The pound is increasing in value

because the investors feel confident in the future of government policies and therefore demand

for 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 both

increasing confidence in UK economic predictions and worries about the US recovery have been

the reasons for this appreciation. The UK economy has experienced growth in the manufacturing

sector, data and secure bank earnings could explain why the UK economy has grown. The US

has struggled to devalue the Dollar using market forces, so it is likely that they will pursue a

second round of quantitative easing, injecting large sums of currency in to the economy to

increase supply and weaken the currency. (BBC, 2010).

The merits of appreciation and depreciation

There are many merits associated with a strong currency and a weak currency. The Pound had

been 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 the

Dollar. The merits of having a stronger currency than a nation from whom you import goods

from means imports are cheaper as the Pound will buy more of the foreign currency needed to

purchase 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 and

already low exchange rates, consumers will feel confident in buying cheap consumer products

that will in turn stimulate the economy. Once equilibrium is re-established in the economy the

government could increase inflation to curb any excessive growth levels and increase taxes to

reduce the trade deficit.

Britain is predominantly an exporter of services rather than products and operates with a trade

deficit. Foreign countries will pay for imported insurance and other financial sector services

provided by the UK. The implications of a weak currency would benefit the British economy as

30

it would allow more importers of financial services a chance to buy from the UK as the foreign

currency would purchase more British Pounds. This would further stimulate the economy and

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 the

industry will gain momentum quickly and house prices will rise soon. This will attract a wealth

of 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 as

well as speculation regarding future growth in the US. During the political instability of May

2010, when it was unclear which government would lead Britain for the next 4 years, many

investors were unwilling to invest in the UK.

The Pound then began to appreciate against the Dollar as further speculation arose regarding the

US economies underperformance. This lead to concern as with low levels of growth and

mounting 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. As

Britain is an importing nation with large trade deficits, consumers would be able to take

advantage of their strong currency with imports. However, many nations are trying to weaken

their currency in order to restore equilibrium in the economy. With a weak currency Britain will

be able to export more financial services and in turn naturally stimulate the domestic economy

emerging out of the recession.

31

Conclusion:

This report has explained the central importance of competitive devaluation. It further

discussed how several economies were affected from the ongoing “currency wars”. The

Currency changes of United States, Japan, China, United Kingdom and Turkey have been

examined over the past 12 months to determine how these countries were being affected by

the currency war. In addition, it also determines the reaction of these countries to the

governmental interventions from the leading economies of the world.

The deliberate devaluation of the currencies of trade surplus countries such as China has

resulted in a “currency war” between major world economies. On the basis of the evidence

explored in this report, it could be suggested that the United States government have used

the monetary policy of “quantitative easing” to deliberately devaluate the value of the US

dollar in response to this global concern, in order to stage a recovery from the sharp

decline of exports in the United States. Based on the findings it seems that the Chinese

government’s efforts to slow down the effects of the US governments growing trend of

protectionism, 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 as

Japan has internal factors such as deflation and staggered internal growth to deal with.

Notwithstanding these peculiarities, the Yen has been adversely affected by the devaluation

of 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 policies

to deliberately devaluate the value of the US dollar has also affected the UK and Turkish

economies. Based on further findings, both UK and Turkish economies reacted to the US

dollars depreciation after May 2010, with appreciation. In addition to USA’s devaluation

policies the Turkish government and central bank have had some influence on the Turkish

Lira’s appreciation from the policies which they have passed on regarding growth rate and

32

trade. Turkey, in all nations examined, is the only nation which is attempting to revalue its

currency. The reason of appreciation of the Pound on the other hand, according the views

of some economists, is mainly because of the recovery from the political instability that

Britain has suffered. However, it is discussed that the devaluation of the US Dollar has

accelerated the appreciation of the Pound considerably.

The span of the currency wars is not easing to predict, especially when the slow growth of

the developed world is taken into account. The economic rivalries between nations are

resulting in furious interventions from the central banks of emerging economies around the

globe such as Brazil, Switzerland and China. They share the same goal: weakening their

currencies. A Stanford economist, John B Taylor said “The United States has an

important role in the world economy to maintain stability and confidence in the dollar”. It

is still uncertain whether how the world will react to the instability of the USD.

33

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