AS Economics PowerPoint Briefings 2007 tutor2u ™ tutor2u ™ Exchange Rates

What is the Exchange Rate? The exchange rate is the value (or purchasing power) of a currency in terms of what it can buy of other currencies

What is the Exchange Rate? A large share of trading is purely speculative – i.e. currency dealers seeking to make a profit! – E.g. buy US dollars in expectation that the dollar will rise against the Euro

The UK exchange rate The UK operates with a floating exchange rate system This means that our currency is market determined If the demand for sterling rises relative to supply, then the external value of the pound will appreciate If the supply of pounds on the foreign exchange market increases relative to demand, then the pound will depreciate in value The sterling index is the value of the pound against a basket of currencies, the value is weighted according to the countries with whom we trade most

Using demand and supply analysis show what happens to the value of the pound when: There is an increase in British exports Foreign investors are seeking to invest cash into British business. Stock market traders are expecting the value of the £ to fall.

Factors influencing the exchange rate: Interest Rates Economic Growth Inflation Balance of Payments Market Speculators