Tuesday, June 5, 2007

Exchange Rates: The Pound and the Euro

examine the possible factors which might have lead to changes in the value of the pound sterling against the euro in recent years.(40)

Let us assume the £ has appreciated against the Euro. Why would the £ appreciate:

Basically it involves more demand for Sterling:

  1. Higher interest rates in the UK. This makes it more attractive to save in the UK, causing hot money flows
  2. Lower inflation in the UK. This makes British goods comparatively more competitive, increasing demand.
  3. Increased productivity and attractiveness of goods.
  4. Speculation. People feel the £ is likely to appreciate in the future
  5. Current account surplus. not actually the case, but it would be more likely to cause an appreciation

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