Currency Exchange Issues - Essay Example

? Currency Exchange Assignment XXXXX XXXXX XXXXX XXXXX XXXXX Sterling/US dollar exchange rate over the last 5 years Since the collapse of the Bretton Woods system, exchange rates between currencies have been very unstable. Under the system of Bretton Woods for instance, exchange rates were fixed at levels determined by the government. Since then, however, rates are determined by people selling and buying currencies in the foreign exchange markets. The history of the pound sterling/USD shows that the rate did not change at all between 1949 and 1966. 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 further 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 resources 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 outlook 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 the Britain Pound negatively are labour restrictions, lack of labour, and high levels of consumer debts. Latest figures have shown that consumer retails sales have grown in a fast pace for the last three years. The British Retail Consortium said the sales were up 2.7 per cent from the previous year. These are welcome news for the United Kingdom and mean that the Sterling is strengthening against the Dollar. The economy may as well be avoiding the ‘triple dip’ recession. With these activities taking place, this could be a welcome relief for the pound that has had a torrid time since the start of the year falling over 7.75 per cent against the USD. A key issue affecting the Pound of late has been the Quantitative Easing (QE). With the extension of the QE, then we are likely to see the pound weakening. On March 5th, 2013, the pound had a positive day on the markets and ended giving one of the best performances of the 16 actively traded currencies. A hint of the QE for the U.K could see the Sterling slide back down. With the interest rate decision approaching fast the Bank of England may decide to turn to the QE for further monetary stimulus. Tourism Industry in the United Kingdom and the Sterling Pound Touted as the world’s 7th largest tourist destination, the UK tourism industry had over 29.2 million visitors in 2011 according to VisitBritain. While domestic tourism seems to be declining in the country due to expensive year holidaying, tourists from the US and Europe are taking advantage of the Sterling’s weakness (it hit a 24 year low against the US dollar). Data from Skyscanner show that the searches made for flights to the United Kingdom from Spain, US, France and Germany have gone up in the last three months, show a bigger rise than during the last year. Analysts say these are welcome news in the Tourism industry, especially since unemployment is rising. On the other hand, Travel Website states that about one in five people who travelled abroad for holidays last year are planning on staying in Britain as the falling Sterling Pound has made foreign travel more and more expensive. Figures from Visit Britain has shown that about 4.9 million of the 25 million people who flew out last year for holidaying will save money this time round by choosing to tour domestically, which of course is less expensive. This economic situation, says Sian Brenchly, has made people take another look at holidays at home. Similarly, Malcom Bell, the CEO of Tourism South West says he believes the boost in business for the industry triggered by the Weak Sterling could outweigh the negative effects of the 2008 recession. Tourism players are therefore encouraged to seize these opportunities as the customers keep flocking in the country to view the seaside areas and the cities. Consumers are taking holidays as a necessity nowadays, rather than a luxury and so they continue to spend on them. With this recession and stress people still need their holiday. The foreign visitors who have come in large numbers spend time in the shops, hotels and restaurants, owing to the weak pound. The strengthening dollar has seen American tourists are flying in to shop for presents, as opposed to Briton flying to the United States. According to the Office for National Statistics tourists spent 1.48 billion pounds, an increase of about 11 per cent year on year in October. Conclusion In my view, the Eurozone is an interest rate decision that will affect the exchange rate. If the ECB cuts rates this could counteract the effects of QE in the United Kingdom. If the United Kingdom undertakes the Quantitative Easing and the Eurozone doesn’t cut rats then the Sterling may weaken. The opposite is also true. The British Pound is still a good currency to do business since it is one of the most stable currencies globally and it is actively traded in the foreign exchange market. References ‘VisitBritain 2010, Internet Statistics Compendium, viewed 9th March, 2013, http://www.un.org/aboutun/charter/history/ Blackwell, E. 2004. How to write a business plan [electronic version]. London: Kogan Page. Retrieved January 28, 2005 from Ebrary database. ‘Sky Scanner 2012, “Flying trends in the year 2012”, viewed 9th March, 2013. http://www.idc.com/getdoc.jsp?containerId=226541. Brenchly, J. 2010, How to set up a web design firm Cosmopolitan County Pound, viewed 30th November 2011,http://www.internetbusinesses.com. Bell, M. 2013, "Online Trading Businesses", Cosmopolitan County Pound, viewed 9th March, 2013, http://www.medibrand.com. Gant, R and Towers, B. 2011 Business Perceptions on having an Internet presence, February 2011, Kingston upon Thames, Kingston University. Jackson, J.2006, ‘Viability of Ecommerce trading in the U.K’, viewed 11 November 2011, http://eprints.lse.ac.uk. Read More