How have goverment policies affected the exchange rate over the period 2012/13 - Essay Example

Impact of Government Policies on Exchange Rate The basic aim of targeting the exchange rate isto provide a link between inflation and monetary policy in a country with that of others. The United Kingdom runs with a system of floating exchange rate where daily worth of one currency against other is ascertained by the market supply and demand forces. Therefore the worth of the sterling depends primarily on the strength of currency demand relative to its supply (Riley, 2012). The exchange rate in UK is also of prime importance so the question arises whether the pound is strong or weak or middling.

The sterling tends to fluctuate quite drastically and hence it is often difficult to believe that same numbers could be watched. Being a financial benchmark that permits divergent interpretations, it also entails some emotional luggage. Strong sterling is considered as a pride by some constituencies as it indicates the virility of British economy. Governments and financial authorities on the other hand are more interested in ensuring a weaker pound sterling as it helps in boosting the exports and attaining a balanced economy.

Besides, the pound is rated against the euro and dollar and is progressively determined by the rate of euro-dollar instead of domestic economic updates (Lowery, 2012). The UK economy has been found to be contracted and didn’t show growth during the last year. The sterling has been seen to lose nearly 5-6% of its worth against the euro and dollar during the January. This weaker sterling flows to businesses through elevated import costs, predominantly of raw materials (PwC, 2013).The exchange rate outlook is evident in the above figure (RBS Group, 2013).

Uncertainty within the market is a precursor of unpredictable fluctuations in the exchange rates. The management of exchange rates is a part of the monetary policy adopted by a country and the declined value of Sterling indicates that the government is interested in increasing exports and most of the businesses seem to be unaffected by the weakened sterling that may result in increased costs in importing raw materials (PwC, 2013). The major business entities within the country obtain the required raw material by building alliances.

ReferencesLowery, A. (2012). Sterling outlook: where is the pound heading against the euro and dollar? This is money. Available at: http://www.thisismoney.co.uk/money/news/article-1652304/Sterling-outlook-What-pound.html[Accessed 17 Mar 2013]PwC. Co. (2013). The impact of recent exchange rate movements on UK businesses. Available at: http://www.pwc.co.uk/economic-services/global-economy-watch/impact-of-exchange-rate-movements.jhtml [Accessed 17 Mar 2013]RBS Group. (2013). Interest & Exchange Rate Forecast.

Available at: http://www.rbs.com/content/dam/rbs/Documents/News/2013/02/Interest-Exchange-Rate-Forecast-Feb-2013.pdf [Accessed 17 Mar 2013]Riley, G. (2012). Exchange rates. Tutor2u. Available at: http://www.tutor2u.net/economics/revision-notes/as-macro-exchange-rates.html [Accessed 17 Mar 2013]