• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Examine possible factors which might have led to changes in the value of the pound sterling against the Euro in recent years.

Extracts from this document...


Unit Six Essay Examine possible factors which might have led to changes in the value of the pound sterling against the Euro in recent years. Since the inception of the Euro in 1999, its relative strength to other currencies has fluctuated largely. In the first few years, confidence in the euro was very weak and its value relative to other major currencies fell significantly. The dotcom crash in the following years and problems due to the relative changeover caused confidence in the currency to tumble significantly. Nevertheless, all new currencies face this problem in the first few years, after the initial teething problems the Euro has gained significantly in strength; to the point that it is becoming a more and more popular reserve currency especially due to the recent decline in the value of the dollar and fund managers hedging against the dollar into commodities. The main thing that determines the value of a floating currency such as the Euro is the confidence that traders place in the currency given that the Euro is traded on the Forex to determine its value. The Euro has strengthened due to increased confidence from traders in conjunction with effective monetary policy by the European Central Bank. The European Monetary Union has enforced many countries to undertake changes to the structure of the economy. Globalisation and immigration has also been a contributing factor to the changes in the growing confidence in the currency. ...read more.


Due to this, the sterling has been stronger than the Euro for the last couple of years. However, with the recent subprime crisis and tumbling value of the dollar, investors have hedged against the dollar into the Euro and other emerging market currencies such as the Yen; both of which have been reaching record highs against the dollar. Unlike the Yuan and sterling, the Euro is not considered to be overvalued thus meaning that the Euro has made sustainable gains against the Euro as the market has begun to correct itself. Expectations of what the central banks will do has also affected the situation, especially since investors expect the ECB to stick and the Bank of England to cut rates in the near future. Nonetheless, recent speeches by Trichet suggest that the ECB will cut rates to help the US, thus reversing the current decline of the sterling. Evaluate the likely economic effects of a significant fall in the value of sterling against the Euro. The Uk's balance of payments would become more positive as a fall in the value of sterling compared to the Euro would significantly increase exports as the EU would consume more British exports, as they are cheaper. This effect would be intensified given that the EU is the UK's biggest trading partner. This would also translate to an increased multiplier effect as exports move through the circular flow of income and aggregate demand could potentially shift to the left. ...read more.


This could lead to cost-push inflation and possible job losses as firms try to protect their profit margins, especially if they can't pass on higher business costs to consumers in fear of reducing demand. Nonetheless it could be argued that this would be better for businesses as it would force them to become efficient and thus improve their comparative advantage on the global scene. (Inefficient businesses would be pruned - this had to be said for comic value) These measures and influences would be dependent on the size of the devaluation compared to the Euro, how quickly it occurs and the fall of the sterling relative to other currencies. Currently, the pound is strong against the dollar and thus meaning that a lot of the above mentioned effects would be offset because the US is the UK's single biggest trading partner in terms of countries rather than states. Given that the pound is also relatively stable against all the other currencies the effects of the fall in the sterling against the Euro would be minimal. It also depends on how the situation can be rectified and whether the underlying problem is structural or merely one that could be eased by increasing interest rates. Of course the situation of the economy needs to be taken into account, thus meaning that even if the Bank of England wanted to increase rates to increase the value of the pound by attracting flows of hot money into the economy that would not be possible to the significant downside pressures affecting the economy. ?? ?? ?? ?? ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Budget 2004-05 and Economic Analysis of Pakistan

    The cement industry has started using coal, both local, as well as, imported to replace natural gas and furnace oil. During July-March 2003-04 the production of crude oil per day has decreased to 62,139 barrels, from 64,905 barrels per day during the same period of last year, showing decline of 4 percent.

  2. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    This weak growth figure seems likely to confirm fears that the UK economy is still far from economic recovery. Although the growth rate compares favourable with zero growth rates in the previous 3 months, it was lower than economists were expecting which was about 0.4%.

  1. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    changes to aggregate demand through fiscal policy, as opposed to monetary policy, that are the main causes of inflation. And these will be out of the control of Bank of England, so the introduction of an independent bank and the MPC to deal with inflation should not have made such a real difference on inflation rates.

  2. Comparing the effects of immigration on GDP in Malaysia, Japan and South Africa.

    Furthermore, owner of restaurants always recruit foreigners as restaurant waiters and cleaners. They have long working hours per day, without annual leave and earning very less salary. Deputy Prime Minister Tan Sri Muhyiddin Yassin says that "If there is need which local labour cannot satisfy and our economy will be

  1. Pakistan is in the grip of a serious energy crisis that is affecting all ...

    The upsurge of inflation is due to energy shortage in Pakistan. Number of people living below poverty line is increasing due to unemployment and inflation, both of which are by-products of energy crisis. Effect on daily life: load shedding has profound effects on a man's psychological condition and mental capacity.

  2. Discuss the measures taken by the current Labour government to enhance the independence of ...

    But this does limit how independent the Bank can be, if there is the possibility of government interference. Along with the move to increase central bank independence, an additional change made by the government at this point was to transfer banking supervision to an enhanced securities and investments board.

  1. Euro Currency and Tourism

    Another disadvantage is that Kenyan companies are not running the hotel businesses and so a lot of money is leaving the Kenyan economy as the hotels are foreign owned. Another disadvantage is that many farmers have been forced out of the way because of the increased demand for land use in tourism.

  2. Greece financial crisis: The main causes of this crisis are? What are ...

    Moral hazard occurs after the transaction takes place. It occurs because a borrower has incentives to invest in projects with high risk in which the borrower does well if the project succeeds, but the lender bears most of the loss if the project fails.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work