The post below considered the pound and now we look closer at some other international currencies and their movements. The pound has fallen, but what about the euro and the US dollar? What about the Japanese yen and the Australian and New Zealand dollars? How are the different currencies inter-related and how do they affect the various macroeconomic objectives? The following articles look at some of the recent movements in currencies. Consider these in relation to economic theory about exchange rates and government policy.
Pound plumbs five-month euro low BBC News (21/9/09)
Australian, N.Z. Dollars fall for third day as commodities drop Bloomberg (21/9/09)
Dollar ready to rise as greenback fades Brisbane Times (21/9/09)
Pound slips on Bank of England warning Times Online (21/9/09)
Canada’s dollar declines for second day on drop in commodities Bloomberg (21/9/09)
Yen firms versus European majors, hitting a 2-day high against pound Forex news (18/9/09)
Data on exchange rates can be found at:
Statistical Interactive Database – interest & exchange rates data Bank of England
Questions
- What have been the general trends in some of the main international currencies?
- The pound has fallen against the euro and the dollar, but what does this mean for the UK economy? And what about the USA and the rest of Europe?
- In the current climate, consider whether a fixed or floating exchange rate would be better for the economy.
- How do changes in exchange rates affect the government’s macroeconomic objectives?
The pound is regarded as an international currency. However, the financial crisis has caused the value of the pound to fall, reaching a four-month low against the euro in September. This recent weakening of sterling is partly the result of worries that the Lloyds Banking Group will find it difficult to meet the ‘strict criteria to leave the government’s insurance scheme for toxic banking assets’ set for it by the Financial Services Authority.
However, one of the main reasons relates to recently published figures showing UK debt (see for data). The UK’s public-sector net borrowing has now reached £16.1bn and the government’s overall debt now stands at £804.8bn: 57.5% of GDP. This represents an increase of £172bn in the past year. Over the longer term, this is unsustainable. The government could find it increasingly difficult to service this debt. This would mean that higher interest rates would have to be offered to attract people to lend to the government (e.g. through bonds and bills), but this, in turn, would further increase the cost of servicing the debt. Worries about the potential unsustainability of UK govenrment debt have weakened the pound.
But isn’t a lower exchange rate a good thing in times of recession as it gives UK-based companies a competitive advantage over companies abroad? The following articles consider UK debt and the exchange rate.
Pound plumbs five-month euro low BBC News (21/9/09)
Market data Telegraph (22/9/09)
Pound slides back against dollar and euro Guardian (21/9/09)
Pound drops as UK stocks fall for first time in seven days Bloomberg (21/9/09)
Public sector borrowing soaring BBC News (18/9/09)
Govt spending cuts ‘could help pound’ Just the Flight (21/9/09)
Pound dips to four month euro low BBC News (18/9/09)
Weak pound hits eurozone holidaymakers Compare and save (21/9/09)
Questions
- What is the relationship between public debt and the value of the pound? How do interest rates play a part?
- What is quantitative easing and has it been effective? How does it affect the exchange rate?
- What are the advantages and disadvantages of a freely floating exchange rate relative to a fixed exchange rate?
- If the UK had joined the euro, do you think the country would have fared better during the recession? Consider public debt levels: would they have been restricted? What would have happened to interest rates? What would have happened to the rate of recovery
One of the biggest consequences of the recession has been a rise in unemployment. As the economy fell deeper into recession, unemployment began to soar and some believe that it could reach 3.5 million and remain high for the next decade.
But while many employees have lost their jobs or had they pay frozen, some of the biggest earners have received substantial pay rises! The bosses of the FTSE 100 companies have seen their average pay increase by 10% and have shared pay rises of more than £1 billion in the past year.
So as the economy plunged into recession and companies lost much of their value, we still saw an increase in the pay gap in the UK. The following articles look at the pay situation of some of the top bosses.
10% pay rise for the top bosses This is Money, Ryan Kisiel (14/9/09)
Guardian Executive Pay Survey 2009: Should pay be capped? Guardian (14/9/09)
What they make: The highest paid Chief Executives in Digital Media Guardian (20/3/09)
Executive pay jumps despite recession: Report Associated Press (14/9/09)
Unemployment could reach 3.5m and remain high for a decade, CIPD warns Telegraph, Martin Beckford (14/9/09
Questions
- How are wages determined in the labour market?
- Why do different people receive different wages? What should happen if two people receive different wages for doing the same job?
- What are the different (a) types (b) causes of inequality?
- Would a maximum price work if it was applied to wages?
- Discuss the advantages and disadvantages of different wages. If everyone was paid the same, would everyone be better off?
All nations are interdependent and few have escaped the recent economic turmoil that began with the collapse of the sub-prime mortgage market in America. Businesses have gone under; interest rates have been cut and then cut again; profits have fallen; unemployment has risen and expectations have remained gloomy.
But, what’s the latest? How is the British economy faring and what about the rest of the world? Some sources suggest that we are already in a recovery, whereas others suggest that the current downturn is not yet over. House prices recovered somewhat in July, but various sources suggest that they experienced their biggest fall in August. The following articles look at recent economic developments.
Job cuts at Vauxhall likely as GM agrees sale to Magna Telegraph (10/9/09)
A look at Economic developments around the globe The Associated Press (10/9/09)
BoE holds QE at 175 bln stg, rates at 0.5 pct Reuters (10/9/09)
Kesa’s UK recovery hit by European slowdown Times Online (10/9/09)
Top US banker criticises bonuses BBC News (9/9/09)
Austrian GDP contraction slowed in Q2 Reuters (10/9/09)
Europe and America’s economies to beat UK, OECD says Telegraph (4/9/09)
Britain will be behind rest of world in emerging from recession Times Online (3/9/09)
Bank of England holds rates at 0.5pc and QE at £175 bn The Telegraph (10/9/09)
Questions
- Do you think the evidence suggests that the outlook for the global economy is improving?
- Why will Britain probably take longer to recover from the recession than other major economies?
- What is the theory behind low interest rates helping the economic recovery?
- Which policies have the UK and other governments used to tackle this economic downturn? Would any others have been more successful?
- In what ways and for what reasons are countries economically interdependent?
Many primary commodity prices have fallen during the recession, but have recovered somewhat as the recession has bottomed out and hopes of a recovery have grown. So what will happen to commodity prices over the next few months and beyond, and what will determine the size of the price changes? The following linked articles look at these questions.
Commodity prices set to rise further, Roubini says Telegraph (3/8/09)
Have oil prices peaked for 2009? Hemscott (25/8/09)
What’s Ahead for Commodities BusinessWeek (23/8/09)
Gas Prices to Triple by Winter? (video) CNBC (25/8/09)
For commodity price data see:
Commodity Price Index Monthly Price Index Mundi
Questions
- What will determine the amount by which commodity prices rise (a) over the next twelve months; (b) the next three years?
- What will determine the size of any change in the Australian dollar from rising commodity prices?
- How does the holding of stocks affect (a) the size of commodity price changes; (b) the volatility of commodity price changes?
- Under what circumstances is speculation in commodity markets likely to (a) stabilise and (b) destabilise commodity prices?
- Explain why gas prices are likely to rise less than oil prices.