Currency Exchange Essay Example | Topics and Well Written Essays - 2250 words

Currency Exchange - Essay Example Around 1967 the GBP was devalued by 14 per cent, a major economic policy decision. Since then, the Sterling, on average has either depreciated or appreciated by 14 per cent every two years. The figure below shows how the exchange rate between the Sterling and the United States dollar has performed over a 5 year period. Around the mid 2008 shows a sharp drop in the exchange rate from around 2.0 to a low of 1.4. The significant change in the movement is attributed to the financial recession of the 2008. Sterling/US dollar exchange rate over the last one year For the past one year, the Sterling has been weak against the USD making the USD an expensive and valuable asset. This means that the clients needing to buys the currency are paying more and more. The reason for this slide may be due to the steps forward by Europe and the US. For instance the situation in Italy may be the key factor for the change in exchange rates which could go on for the next couple of weeks. Also, with a furthe r round of Quantitative Easing expected in the UK, the Sterling has been losing ground against the USD. Rates have dropped and whilst many expect this trend to continue should QE be confirmed, this in my view is being priced by the investors. Notably, the pound is not only losing ground against the USD but against other major currencies and the recent drop against the Euro and the Australian Dollar are no coincidence. It is floating around 1.50 against the USD and at an all-time low against the AUD. The following figures give the performance of the Sterling against the USD for a the last 12 months, narrowing down to 6 months and 3 months respectively. Key factors affecting the Sterling Being the sixth largest economy in the world and the third largest economy in Europe, the United Kingdom has a lot to boast about. For instance, the United Kingdom is able to produce over 60 per cent of its food with less than 2 per cent of the labour force. The United Kingdom also has numerous resour ces at its disposal, for instance oil, natural gas and coal. However the country was hit hard the financial crisis with growths rates going down to 0.3 per cent in Quarter 1 of 2010 and 0.4 per cent growth in Quarter 4 of 2009. The UK has a capitalist economy that is highly productive with a strong financial services industry. On a global basis the British Sterling Pound is undervalue. For instance, the purchase price parity shows that the Sterling should fall in value over time, but high investment flow potential means the opposite is what will happen, that is the Sterling will increase in value. According the United Kingdom’s Value Investor Survey, which reflects short term investment, the economic environment is very favourable for long term economic growth because of high scores on the government transparency, economic diversity and economic freedom. An undervalued currency, a favourable business environment and a moderate investment flow potential leads to a positive out look for the United Kingdom investments. Factors that have positively affected the British Sterling Pound are lower rates of unemployment and the foreign students. The UK, the US and Australia are the leading centres in attracting foreign students to study in their countries. These students obviously provide many social and monetary benefits that propel the economic activities of the host countries. Some factors that have negatively affected th