exchange rates

Euro carry trade

Euro carry trade

A carry trade occurs when an investor borrows in one country (at a low interest rate) and invests this money in another country (which has higher interest rates.) If we assume exchange rates are stable, then this carry trade enables an investor to make a profit – and the profit could be even more if the investor uses leverage. Euro carry trade explained Let us assume that interest rates in Europe are 0%, but the US increases interest rates to 4%. Then if you borrow £10,000 at 0% in Europe, you can invest…

Exchange rate movements – Sterling, Euro and Dollar

Exchange rate movements – Sterling, Euro and Dollar

The effective exchange rate measures the value of a currency against a basket of other currencies. This exchange rate index is usually trade-weighted to take into account the relative importance of other currencies. When looking at the effective Sterling exchange rate we will compare the value of Sterling against our main trading partners – The Euro, the Dollar, the Yen e.t.c and give a weighting depending on how much we trade with that currency, e.g. Eurozone 60%. A weighting will be given to different trading countries depending on how significant…

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Real effective exchange rate

The real effective exchange rate measures the value of a currency against a basket of other currencies; it takes into account changes in relative prices and shows what can actually be bought. Nominal exchange rate The nominal exchange rate measures the current value of a currency against another. For example, in Sept 2014 £1 – $1.61 or $1 = £0.62 Effective exchange rate The effective exchange rate measures a currency against a basked of other currencies. This is usually trade-weighted. When looking at the effective…

The effects of an appreciation

The effects of an appreciation

An appreciation means an increase in the value of a currency. It means a currency is worth more in terms of foreign currency. A example of an appreciation in the value of the Pound 2009 – 2012 Jan 2009  If £1 = €1.1 June 2012 £1 = €1.27 In this case we can say there was a 15% appreciation in the value of the Pound against the Euro – between Jan 2009 and June 2012   Effects of an appreciation on the UK…

What happens to value of currency during recession?

What happens to value of currency during recession?

Readers Question: What will happen to the value of a currency during times of deep recession and high inflation? There is no hard and fast rule about what will happen to the value of a currency during a deep recession. For example, when the great recession started in 2008, the UK experienced a significant depreciation. The Pound Sterling fell nearly 20% from 2007 (before the start of the great recession) to July 2009 But the Euro and Dollar were less affected by the…

Does a devaluation really help the economy?

Does a devaluation really help the economy?

Recently, we looked at whether a strong currency would help the economy – Is a strong currency a good thing? The other side of the equation is – to what extent will a devaluation will help an economy? Commentators frequently write that devaluation (1) should help ‘rebalance’ the economy and help create an export led recovery. But, since 2008, we’ve seen a 25-30% devaluation in Sterling and we are left with only very weak recovery, cost push inflation and a surprisingly large current account deficit. It seems the depreciation…

Is a strong currency a good thing?

Is a strong currency a good thing?

Readers Comment from post: Should the UK join the Eurozone So now it is 2013. Britain has spent a number of years with it’s interest rate set at just about zero, has entered a triple recession, has lost it’s AAA credit rating and Sterling is only worth €1.15 a drop of over 30% against the Euro. So for those who still cannot see the wood for the trees and still believe the “anti-euro” propaganda wake up and smell the coffee. I will put it this…

Forecast for Pound Sterling in 2013

Forecast for Pound Sterling in 2013

A look at the future prospects for the Pound in the coming months of 2013. The Sterling index measures the value of the Pound Sterling against a basket of trade weighted currencies. In  Dec 2011 the index was 80.4 By Oct 2011, the exchange rate index has increased to 83.6 This modest appreciation in the Pound has occurred despite: Double dip recession in UK UK Inflation remaining above target Growing current account deficit Quantitative easing increasing money supply. One of largest budget deficits in OECD Therefore…