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International Finance - currency - Essay Example

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The pound began its journey in the year 2003 in the international FOREX market with mixed fortunes establishing a clean lead in the previous year over the world major and leading currency, the US dollar but losing phenomenal ground against the budding Euro…
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FOREX experts thought that the pound would begin the year 2003 on an optimistic note but unfortunately for the pound, that year also began with a downward trend against the Euro and continued till the year end. The first quarter saw the pound value against euro drip by 5.8% from 1.539429 to 1.449098. It further continued the downward journey to 1.438329 by the end of second quarter reaching its lowest of the year at 1.397857 on May 30. The decline in the second quarter was 0 .7 % and negligible when compared to the first quarter decline. On the whole, the pound dripped by 6.56 % during the first half of the year which had seen the euro rise against the pound from 0.649591to 0.695251. The following table and the subsequent graph show the decline of the pound against the Euro as explained earlier in the first half of the year 2003.
The European Central Bank (ECB) has continued with a policy of consistency in bank rates boosting up the morale of the Euro in FOREX markets. In January and February, 2003, the Governing Council of ECB decided to continue with existing rates of 3.75% and 1.75 % for marginal lending and deposit facilities respectively. The minimum bid rate on main refinancing operations also continued to be at 3.75% putting at rest all the rumours. This was followed by a report, released on February 24, 2003, that claimed that the solvency levels of EU banks also continued to be even stronger. The regulatory capital ratio for EU banking system stood at 12% as against the minimum requirement of 8% in the preceding two years of 2001 and 2002, according to this report (Press release, 24 February 2003-EU Banking sector stability, The banking sector has remained stable).
While these decisions helped the Euro maintain its stability and uptrend against the pound, some unfavourable trends persisted on the home ground for the latter currency adding fuel to the fire. No doubt, the British economy had recorded maximum growth rate in the third quarter of 2002 due to buoyancy in consumer spending and rising of prices while the GDP rose by 0.94 % in comparison with the previous quarter. But the inflation rate had crossed the Bank of England's (BOE) expected target of 2.5% reaching almost 2.8% in the last quarter (Released on 1/9/03 For
4
Jan 2003 ). The BOE defended the inflation rate arguing that the tendency was temporary and had its sources in the rising prices of oil and housing. With a view to reverse the inflation trend, the BOE had reduced the interest rate to 3.75 percent from 4%. This was the lowest level borrowing rate in the country since 1955 (Released on 2/6/03 For Feb 2003) and it naturally made the public and FOREX traders lose interest on the pound leading to its continuous downtrend against the Euro. The following table shows how it went down further in the second half of the year 2003.
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