1. 1

2. Table of Contents
1-THE US DOLLAR AGAINST THE EURO........................................................................................................5
2-THE JAPANESE YEN AGAINST THE US DOLLAR........................................................................................10
3-THE CHINESE RMB AGAINST THE US DOLLAR.........................................................................................15
4-THE TURKISH LIRA AGAINST THE US DOLLAR.........................................................................................20
5-THE BRITISH POUND AGAINST THE US DOLLAR......................................................................................24
BBC News (2009)’ Weaker dollar hits Airbus owner’. 16 November, 2009. [Online] Available at: http://
news.bbc.co.uk/1/hi/business/8361799.stm [Accessed: 3 November, 2010].......................................31
Economy Watch (2010) US Dollar, US Currency, USD, US Dollar Exchange Rate. Available at:
http://www.economywatch.com/exchange-rate/us-dollar.html [ Accessed: 23 October, 2010].............33
Steverman, B. (2008) ‘The weak dollar and investors’. Bloomberg Business Week. 5 May, 2008.
[Online] Available at:
http://www.businessweek.com/investing/insights/blog/archives/2008/05/the_weak_dollar_and_inve
stors.html [Accessed: 3 November, 2010].............................................................................................35
The Economist (2010) Burgernomics: When the chips are down; The latest Big Mac index suggests the
euro is still overvalued. Available at: http://www.economist.com/node/16646178?
story_id=16646178#footnote1 [Accessed: 6 November, 201]..................................................................35
Yousuf, H. (2010) ‘10-year Treasury yield below 3%’. Cnn Money. 29 June, 2009. [Online] Available at:
http://money.cnn.com/2010/06/29/markets/bondcenter/treasurys/index.htm [Accessed: 28 October,
2010].........................................................................................................................................................38
2

3. Introduction
In recent months the world economy has been on a war footing, at least theoretically. This
has been as a result of government interventions in order to gain competitive advantage by
influencing the value of their currencies. Trade surplus countries have initiated “currency
wars” over the years by exporting cheaper goods at low currency rates. For instance,
because the Chinese government owns most businesses, it is able to keep the Yuan
artificially low.
During the financial crisis and global recession, there was a sharp decline in world trade.
With recovery in progress, in order to gain competitive advantage and accelerated growth,
export based countries such as China and South Korea have devalued their currencies to
be able to export more commodities to the global market. In response, trade deficit
countries such as the United States and United Kingdom have introduced monetary
policies to devalue their currencies in order to be able to compete in the export market.
3

4. As a result of the competitive devaluation of currencies between USA and China (at
present, the two world leading economies), the currencies of other world economies such as
Japan, Britain and Turkey are being affected. This report will discuss the key factors that
have contributed to the changing value of currencies and the relative merits of currency
appreciation/depreciation. The US Dollar was used as the base currency when the path of
the currencies of Japan, China, Turkey and UK were being observed over a 12 month
period, while the path of the US dollar was observed against the euro for the same period
as above.
The first section of this report will examine the path of the US dollar against the euro. In
addition the causes of the fluctuation of the US dollar against the euro will be related to
exchange rate theories.
The second section is going to talk about the government interventions undertaken by
Japan and USA through the use of monetary policies to gain an advantage on the export
market. Hit will also look at the trend of the Japanese Yen against the US dollar and the
economic implications of its appreciation.
The third section will force on the changing of Chinese RMB currency and the forces from
US to push RMB appreciation.
The fourth section of the report will examine the relationship between the Turkish Lira
and the US Dollar. Also, the implications of the revaluation of the lira by the government
will be discussed.
The final section will examine the relationship between the British Pound and the US
dollar. In addition, the key factors that affect the British currency will be examined.
4

5. 1-THE US DOLLAR
AGAINST THE EURO
Omotayo Atunde
10244643
Word Count: 1,098
5

6. 1.1 INTRODUCTION
The United States has the world’s largest economy and the U.S dollar is the most traded currency
in the world. In addition the US dollar is the world reserve currency (Economy Watch, 2010).
This section of this report will use appropriate tables and figures to analyze and examine the path
of the US dollar against the euro for a 12 month period. The possible reasons for the fluctuation
between these currencies will be examined and related to exchange rate theories. The possible
implications of the intervention of the US government in devaluating the US dollar will also be
stated.
Table 1 below shows how the United States dollars moved against the Euro for a period of 12
months.
Table 1.0: Exchange Rates of the U.S Dollar against the Euro for a 12 Month Period.
DATE DOLLAR EURO (€) %
($)
NOV. 16/09 1 0.6673 - 0.58
DEC. 17/09 1 0.6968 +4.42
JAN. 15/10 1 0.6952 - 0.23
FEB. 16/10 1 0.7267 + 4.53
MAR. 16/10 1 0.7263 - 0.05
APR. 16/10 1 0.7406 + 1.96
MAY. 17/10 1 0.8069 + 8.95
JUN. 17/10 1 0.8078 + 0.11
JUL. 16/10 1 0.7734 - 4.25
AUG. 16/10 1 0.7798 + 0.82
SEP. 16/10 1 0.7648 - 1.92
OCT. 15/10 1 0.7153 - 6.47 Source: Adapted from Yahoo
Finance, 2010
6

7. Figure 1.0: Volume of world merchandise exports, 1965- 2009 (Annual percentage change)
Source: WTO International Trade Statistics, 2010
Figure 1.0 above show that there was a sharp decline in world merchandise exports in 2009 as a
result of the global recession, which affected major world currencies especially the US dollars
(WTO, 2010).
Figure 1.1: Path of the U.S Dollar Relative to the Euro for a 12 Month Period
Source: Yahoo Finance, 2010
7

8. According to figure 1.1 above the value of the dollar hit an all time low in the 12 months period
relative to the euro in the period of November 2009 (Yahoo Finance, 2010). It can be noticed
further in figure 1.1 that the US dollar staged a recovery against the Euro around the period of
December 2009 and maintained an increase through January to May 2010. Although the US
dollar experienced a few fluctuations during its recovery period as above, it peaked at $1 to
€0.8078 in the period of June 2009 which was a 0.11% increase over the previous month.
However, the dollar lost ground against the euro during the period of July 2010. Although the US
dollar tried to stage a recovery around the period of August, it recorded a dramatic downturn
against the euro from the period of September through October 2010 (Yahoo Finance, 2010).
The possible reasons for these fluctuations will be examined below.
1.2 Key Factors:
In an attempt to revive the U.S economy in March 2009, the U.S government proposed to
embark on “quantitative easing” (Stewart, 2009). The U.S government proposed to buy U.S
government debt and bonds to the tune of $1trillion dollars (Stewart, 2009). Interest rates were
lowered at 0-0.25% with the expectation that people in the United States would spend more in
the economy and take advantage of the lowered interest rates to secure loans rather than save.
However, the diverse effect of the “Quantitative easing” was that the value of the U.S dollar fell
sharply against the euro (Stewart, 2009). On this basis it may be inferred that investors opted to
invest overseas to gain a higher return on their investment in other countries with high interest
rates , in that low interest rates does not guarantee high returns on investment (Hill, 2007, p.404
– 405). The dollar depreciation around the period of November 2009 could be based on this
reason.
The recovery of the dollar that was initiated in the period of December 2009 through May 2010
can be related to the recovery of the United States economy during that period (Nohara and
Nicholas, 2009). Although Interest rates were kept “extremely low” employment and consumer
8

9. spending trends increased the circulation of money in the economy which improved the US
economy as a result strengthening the US dollar against the euro (Nohara and Nicholas, 2009).
In addition the U.S is widely known as a “safe haven” to invest during economic downturn
because its treasuries are backed by the US government (Yousuf, 2010). This attracted investors
from the euro zone around the period of June 2010, following the fear of investors that the
private – sector banks might not be able to pay the European central bank loans to the tune of
€442 billion which might have a ripple effect on the economy (Yousuf, 2010). Consequently a
high demand of the U.S dollar by the Euro Zone could have strengthened the US dollar against
the euro.
The downturn of the dollar around the period of September through October 2010 in fig 1.1 as
above can be related to the speculation that the US government was about to proceed on another
round of “quantitative easing” (QE2). However the impact of the speculation resulted in a “sell –
off” of the US dollars which consequently resulted in a continuous fall of the US dollar (Aldrick
and Blackden, 2010).
The depreciation of the dollar based on investors seeking higher interest rates abroad may be
related to International Fisher Effect which suggests that the value of currencies would change
based on the interest rates of the economy, which may be as a result of inflation (Hill, 2007;
Rugman and Collinson, 2006).
The “Big Mac” index based on the purchasing power parity theory suggests that price inflation
of goods and services in the U.S may cause the US dollar to depreciate in value (The Economist,
2010).
9

10. Although quantitative easing has resulted in the depreciation of the dollar, the 12 month period
examined is too short to conclude as to whether the fluctuation of the US dollar can be
underpinned by the exchange rate theories examined. This is because it is very difficult to
accurately determine the forces that affect exchange rates (Hill, 2007).
1.3Merits of appreciation and depreciation
Businesses can take the advantage of a weak dollar to compete internationally by making their
exports cheaper. As a result manufacturing in the U.S will increase and jobs in the United States
will also increase, which is good for the economy. In addition increased exports will help in
reducing US trade deficit abroad (Steverman, 2008). However European Aero Space Company
(EADS) lost 87m Euros ($130m) in 2009 as a result of cut profits due to a weak dollar (BBC,
2009).
CONCLUSION
This section of this report has examined how the US dollar fluctuated against the euro for the
period of 12months. It examined the possible reasons for these fluctuations and related them to
exchange rate theories. Based on the evidence explored above “quantitative easing” has been a
monetary policy used by the U.S government in attempt to deliberately devaluate the US dollar.
It was suggested that a weaker dollar will make US goods more competitive in the international
market which will consequently increase jobs especially in manufacturing.
2-THE JAPANESE
YEN AGAINST THE
10
US DOLLAR
Emmanuel Adu-Boakye
Word Count: 1,104
10245255

11. Introduction:
This section is going to focus on the competitive devaluation of the Japanese Yen and the US
dollar; the government interventions by devaluing their national currencies in order to gain
competitive advantage and accelerated growth.
The beginning is aimed at explaining the relationship between the two currencies using a chat.
Also in this section, I will try to explain the causes of the variations between the currencies and
in doing so employ a couple of theories of exchange rate movements such as price inflation,
interest rates, market psychology and in doing so, employ the theories of demand and supply of
money. Finally, I will look at the economic implications of the “currency war” on Japan’s
economy.
Figure 2.1
Trend of the Japanese Yen against the US dollar
Sourced from financial times 2010
The graph shows that the yen hit a 14year high against the dollar in November 2009 at 84.83
since it hit its highest of 79.75 in April 1995 New York Times (2010) but the government of
Japan intervened verbally and saw the Yen weaken against the dollar in January 2010. The bank
of japan unveiled a credit steps in December and January when the then finance minister Naoto
Kan (now prime minister), urged the bank to do more to combat deflation. It can be realised that
11

12. the yen rose against the dollar again but in June, the Yen fell against the dollar. The Yen declined
to the lowest level 94.98 in two weeks against the dollar after Prime Minister Hatoyama tendered
his resignation. A senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s
second-largest banking group, Masahide Tanaka said “If Kan, who is an advocate for a weak
yen, replaces Hatoyama, investors’ expectations will strengthen for the yen to decline.” Business
Week (2010). The rise from this point however is accounted for by the Euro crisis which caused
investors to look for a safe haven in Japan since USA investors lack faith in their economy as
well Smith (2010). This pushed the yen up to 83.07. In September, Japan’s finance ministry
intervened in the markets for the first time in more than six years bringing it down to 85.85 but
the currency has been creeping back towards its pre-intervention 15-year highs (financial times
2010). One of the major reasons behind this was the announcement of quantitative easing by the
USA government which is a de facto attempt to weaken the dollar. The percentage change in the
yen over the year has been -10.62% meaning that for instance, if I had bought one share at
90.34JPY in November last year, I would have made a loss of -9.59JPY by now with the yen at
80.63 (02/11/2010).
Key Factors:
Theories of exchange rate movements seem to agree that three factors namely, the country’s
price inflation, interest rates and market psychology have key impact on movements in a
country’s currency. Hill (2007)
Figure 2.2
12

13. Source: Google online images.
The circular flow of income in japan has many loop holes which have caused the Yen to
appreciate. For the currency of a country to strengthen, all factors being equal, the domestic
growth rate must be high Dicken (2010). In the case of japan however even though the growth
rate is very low, the currency keeps raising so could it be due to external factors?
First of all Japan has fallen into a deflationary trap that has cost it decades of economic growth.
The country's central bank announced a scheme to offer 3 trillion yen ($35bn; £22bn) in low-
interest loans in an effort to spur economic growth (BBC news 2010a) but it is difficult to make
monetary policies work effectively in a deflationary trap Krugman P. (2010). In deflation, people
refuse to take loans no matter how low interest rates might be. Life expectancy is 83years in
Japan World Bank data base (2009), there are more elderly people in the economy so the
government spends more on retirement benefits. With reduction in savings, money leaving the
firms is not going back into the firms.
Also, with low interest rates, Japanese investors invest in overseas assets more than in domestic
ones. With the rise of the yen, investors are now selling their foreign currencies in order to be
able to repay their yen loans. This has brought about an increase in the demand for yen and
consequently an increase.
13

14. Another factor is the fact that investors shifted to Japan as a safe haven in the Euro crisis. A
report in the China daily (2010) confirms this shift as china made a record investment about $6
billion in japan bonds in the first quarter of this year. Again with Japan’s advantage faded in the
carry trade and rising yen, foreign debtors are in demand of the yen to pay their loans BBC
(2010).
Business and economic implications
The appreciation in the value of the yen is not good for Japanese exporters. Exports make a huge
percentage of the Japanese economy. Analysts say the country's export-led recovery appears to
be faltering as the value of the yen appreciates BBC (2010b)
On the other hand, the value of the currency is good for consumers because they are able to
import commodities for relatively cheaper costs. Notwithstanding these benefits to the
consumers, this again goes a long way to hurt the Infant and local industries in Japan because
they are likely to face competition with cheaper imported good.
In any case, more imports should also bring the trading account of japan from a huge surplus
which is indirectly making the currency appreciate to a balance and eventually get the yen to its
original position.
Conclusion
The path of the Yen against the US dollar has been explained and the various interventions have
been outlined mentioning their effects on the economy as well. It was realised that all the
interventions of the Japanese Government in the past have yielded positive results and pushed
the Yen down in order for exports to be competitive. Even though recent interventions have not
been successful, it is expected that the Yen will fall in value again with plans on government
intervention in discussion. Meanwhile, the appreciation of the yen should not have such an
adverse effect on the economy because Japan has few natural resources such as crude oil and
“raw earths” and therefore rely on import to produce their goods. The appreciation of the yen
presupposes that imports of these raw materials are cheaper for Japanese home-based
manufacturers. Again, manufacturers are benefiting from the low cost of labour and other
14

15. resources available in the country due to the deflation situation. Japanese exports have goodwill
and will still compete on the markets even at their high prices.
3-THE CHINESE RMB
AGAINST THE US
15
DOLLAR
Hongyuan Cao
Word Count: 1,096
6153258

16. Introduction:
This section will forces on the currency war between Chinese Renminbi (RMB) and US dollars.
This section has been composing by three parts, firstly; the report will briefly describe the path
of the currency against the US dollars over the past 12 months. After that, the second part will
explain the key factors that have contributed to the changing value of the currency and comment
on the relationship of these factors to exchange rate theories. The final part is the discussion of
relative merits of RMB appreciation or depreciation.
Figure 1 represents the exchange rate changing between RMB and USD in last 12 months. The
exact exchange rate of 1 USD to RMB was 6.64320 on 17th of October, very close to the lowest
point in last 52 weeks which is 6.64190. According to BBC Business, it is 6.8281 RMB to 1
USD in the November of 2009. It means in last 12 months, RMB has appreciated 2.71%, it was a
dramatically change in the foreign exchange rate for both counties. The factors of this change
will be discussed in next past of this section. Base on the figure 1, the dramatically changing was
happened after June of 2010, it is kept very stable before June. Moreover, June of 2010 is not the
start of RMB’s appreciation against USD. According to Worldbank Data, the appreciation of
RMB against USD is start from 2004, the average rate against USD is 8.3 and it is appreciate to
6.8 in 2009, approximately 18%.
Figure 1: United States Dollar-Chinese RMB
Source from BBC Business 2010
16

17. The following part will explain some factors push this appreciation. Fundamentally, the changing
of exchange rate is base on the relationship of supply and demand; moreover, the inflation rates
and interest rates will also influence the exchange rate (Hill, 2007). According to Rofoff (1996),
running a deficit on a balance-of-payments current account (a country importing more than
exporting) creates pressures that may result in the depreciation of the country’s currency on the
foreign exchange market. However, Chinese General Administration of customs noted that
Chinese trade surplus of 16.9 $ billion (Macartney, 2010). Interest rate is another factor of
exchange rate. According to Carbaugh (2000), the increasing of interest rate (relative to foreign
nations) is an important factor of increasing of exchange rate. Chinese interest rate is 5.31, but
US is only 0.25, this dramatically distance could be another factor of the exchange rate change
(Treading Economic, 2010).
Political force is another is an essential factor of the changing because weaker dollar should
stimulate the economy (Financial Times, 2010). Approximately 53 per cent of American think
free trade has been bad for the country (Luce, 2010). According to the report of Wall Street
Journal in October, U.S. steps up pressure on China. Because base on the US-China Business
Council‘s statistics report, US is China’s top export destination in the world, which account
18.37% of China’s total export to the world. Furthermore the US balance in the trade with China
was -226.8$ billion and the economic growth.
At the same time, the force from US is due to further forecasting of US is not gratifying.
Economist (2010) said “don’t hang your hopes too high”, the March forecasting of the GDP
growth for US in 2011 is 2.8%, however, only 6months later, the forecasting is 1.7%. This
forecasting push US government tends to reduce the unbalance of payment with China to raise
the domestic demand.
The possible tariff barrier set by US is another factor. Chinese government want keep RMB
stable to protect their export, Wen Jiabao said ‘an unstable Yuan put the global economy in peril’
17

18. (Economist, 2010), because export is a significant part in Chinese economic. In 2009, Chinese
export is over 26% of total GDP and it has already decrease from nearly 40% in 2006
(Worldbank 2010). However, last September the US imposed punitive duties of up to 35% on
imports of Chinese-made tyres (BBC NEWS, 2009). Moreover, according to Tyson (2010), US
senator Charles Schumer said in June, he plans to advance trade-sections legislation. This could
dramatically influence China’s economic and unemployment rate even the stable of political
system.
Finally, some relative merits of RMB’s appreciation of depreciation will be discussed.
Depreciation of RMB could be a tariff barrier of China. According to Pilling (2010), the
undervalued currency is a tariff barrier by other means. As the report mentioned, export is a
significant part of China’s economic. Therefore, the depreciation of RMB could increase the
unbalance of payment between China and US. China could take the advantage of foreign
currency (Carbaugh, 2000) to export more product to US since US is still one of the biggest
market in the world even is much smaller than China. At the same time, it could also reduce the
import to China, because the price of foreign products will be more expensive. It could increase
the demand for domestic products and this demand is internal, stable and not dependence on any
other country. So it will push China’s economic keep growth.
Appreciation of RMB is good news for the business which tends to increase the import. For
instance, according to WorldBank database, the energy import of total energy use is dramatically
increasing in past few years (from -0.2% in 2001 to 7.2% in 2007). The appreciation could
reduce the import cost for these energy organizations. Also it could benefit to Chinese oversea
student in US. By 2020, China hopes to play host to 300,000 international students in the world
and US is one of the major destination of oversea student (Eder, 2010). At the same time,
China’s people could buy a US product in China such as Ipad which is very popular in China.
Conclusion
18

19. The political forces from US is the major factor of the appreciation of RMB, and both of
appreciation and depreciation could bring advantage to different industries in China and
depreciation that has served China so well. However, China’s government should not keep their
currency undervalue, because it could force a US with high unemployment into protectionism
(Pilling, 2010). In addition, America will win this currency war- because it has a limitless
capacity to print dollars (Wolf, 2010). But China also has some unique weapons at its disposal
which is great capacity to neutralize the impact on the domestic economy (Flanders, 2010). One
of the most powerful trends to emerge from the currency war is a renewed effort to reduce
economic dependence on western economies (Dyer, 2010). How to move their economic
structure to a stable and independence form (Dyer, 2010), this structural reform is an essential
issue for China’s government.
19

20. 4-THE TURKISH LIRA
AGAINST THE US
DOLLAR
Mustafa Mert Dikmen
10252709
Word Count: 1,096
20

21. THE TURKISH CURRENCY AGAINST US DOLLAR
This part of the essay will examine the exchange rates between the Turkish Lira and the U.S.
Dollar’s relation with each other. In addition, it will discuss some of the main factors that are
contributing to the changing value of TL against the U.S. dollar and the relative merits of
currency appreciation and depreciation.
Examining trade relationships amongst countries along with their government policies, growth
rates and political stability will be contributive when trying to make sense of their mutually
interdependent currencies. However, in most cases it is quite difficult to tell whether or not a
stronger currency or a weaker currency is favourable.
Figure 4.1:TURKISH CURRENCY AGAINST THE US DOLLAR IN THE PREVIOUS 12
MONTHS
The graph above illustrates the trend of the US Dollar against the Turkish Lira in a one-year
period. On October 2009, 0.68 USD was equal to one Turkish Lira. Starting from October the
exchange rate between two countries fluctuated around 0.67 until the USD reached a plateau on
21

22. June 2010 of about 0.62 USD. After the Turkish Lira’s big devaluation on June 2010, the TL
started to revaluate very rapidly and reached the level of 0.71 against USD. From October 2009
to 2010 the value of the Turkish Lira has increased by 4.41% against the USD.
KEY FACTORS CONTRIBUTING TO THE CHANGING VALUE OF TURKISH LIRA
Economic growth is one the main key factors that contributes to the changing value of the
currency in Turkey. If the reason of the economic growth in one country is basically domestic
consumption and budget deficit, the demand of foreign currency and imports will increase,
which can result in currency depreciation. However, if the reason behind the growth is foreign
investment and exports, the currency will appreciate. In the first quarter of 2010, the Turkish
GDP has expanded by 11.7% on an annual basis which was the second fastest expansion in the
world after China. In the same period the growth took place, Turkish currency depreciated from
0.69 to 0.64 TL against the US dollar. Furthermore, in the second quarter of 2010 the Turkish
currency appreciated while the GDP reduced by 1.4% to 10.3%. Despite the record economic
growth, the value of the TL did not appreciate against the USD at all, which indicates that the
economic growth in Turkey cannot be related to foreign investments and exports. In fact, the
data collected from Hürriyet Daily News (2010) in June suggests that trade deficit has widened
to 6 billion dollars with an increase of 1.8 billion in the previous 12 months.
Another key factor which contributes to the changing value of currency in Turkey is the political
stability. According to The Economist (2010), after the referendum was held on September 12th
2010 “Turkey’s growing influence has fostered a new national confidence that has replaced
decades of paranoia and prickliness.” The new politically stabilized Turkey has continued to
attract even more foreign investors in the Turkish economy in the previous year. Since FDI
requires purchase of the foreign currency, the demand for the TL increased. The increasing
demand of currency had a triggering effect on the Turkish currency against the USD as the USD
depreciated against the Turkish Lira experiencing its lowest rate of 1.42 TL since January.
Trade relations of Turkey have always had an impact on the US economy, given that the USD is
used for trade with most of the countries who are in business relationships with Turkey.
Accordingly, the US government’s currency policy to lower the value of the dollar is expected to
expand the trade volume of Turkey. In addition, it will encourage the Turkish economy to import
22

23. even more goods than they are now. Considering Turkey is one of the only few nations that have
a trade deficit with USA, the US Commerce Secretary Gary Locke, stated his aims as to double
the US exports to Turkey (United States Department of Commerce 2010). USA’s successful
policy to devalue its currency summing up with Turkey’s politically stable position resulted in
the Turkish Lira to appreciate in U.S. dollar terms.
RELATIVE MERITS OF CURRENCY APPRECIATON/DEPRECIATON
Getting into debt causes the budget deficit to expand therefore raising the inflation rate. Turkey’s
debt was placed at the 26th spot on a list of 32 most debt-ridden countries with 266 billion dollars
of debt according to World Bulletin 2010. When the huge debt is taken into account, a stronger
currency will be in the favor of Turkey because it is likely to decrease Turkey’s foreign debt.
Appreciation of TL will therefore lower the imported commodity prices in the domestic market,
slowing down the inflation rate. (World Bulletin 2010) According to TÜİK (Turkish Statistical
Institute) the CPI and PPI decreased by 0.56% and 0.50% respectively in July 2010 during a
period when the TL was appreciating.
Furthermore, not only will currency appreciation lower the cost of living in the country for
citizens, it will also strengthen Turkey’s relationships with their major trade partners China,
Russia, Germany and USA. Turkey’s % 40 increases of imports from China, according to the
report of TÜİK on 2 7th October, can be related to the appreciation of the TL against the USD.
On the other hand, a depreciating TL would encourage domestic businesses to export more. For
example, the Turkish automotive, textile and fresh fruit and vegetables exports decreased
significantly because of the strengthening Turkish currency. This decrease in the exports has led
some of the Turkish exporters to pressure the government for a weaker currency. ( Hürriyet
Daily News, 2010)
CONCLUSION
23

24. In conclusion, this section of the report identified the fluctuations of the Turkish Lira against the
US Dollar and evaluated the macro-economic effects that had an impact on these fluctuations.
This section also illustrated the merits of a strong TL, as well as, a weak TL and discussed what
implications these advantages would bring to the Turkish economy. Turkish governments recent
agreement with China (Today’s Zaman, 2010) to launch trade in TL instead of the usage of US
dollar is expected to increase Turkey’s trade volume which is an optimistic step for Turkey
considering the Turkish government’s efforts to increase the value of the TL against the USD.
Prior to the agreement, every time a trade took place between Turkey and China, the importing
nation had to buy US dollars with their home currency revaluating the USD. The findings of the
report suggest that the Turkish government and the central bank have had some influence on the
TL from the policies which they have passed regarding the growth rate, political stability and
trade.
5-THE BRITISH
POUND AGAINST
24
THE US DOLLAR
Mohammad Alkhatib
Word Count: 1,091
09249398

25. Introduction:
This section of the report will evaluate the causes of the fluctuation in the value of the British
pound over the US dollar and identify if these causes are in line with exchange rate theory. Also
in this section of report will be a graph that shows how The British pound has depreciated
against the US dollar over the past 12 months, identify the reasons that caused the Pound to
depreciate and explain why the changes in US dollars is important to British economy. This
section will also evaluate the merits of the appreciation and depreciation of the pound and
discuss how this will impact the economy and business operating in the British economy.
Figure 5.1 : The UK Pound Against The US Dollar
Table 5.1: The percentage change during the 12 months in the UK pound.
30th September 2009 1st October 2010
1.60 1.58
-1.25%
25

26. This graph shows the relationship between the British pound and US dollar over a 12 month
period. At the end of September 2009, £1 was valued $1.60. However in the middle of May
2010, £1 was valued $1.43 and this means that the British pound depreciated in the first quarter.
Since then it has remained more or less stable. There was appreciation seen in the British pound
after the month of May 2010, so the cost of one British pound today costs around $1.58.
Key Factors:
One of the main reasons behind the depreciating currency is the political instability caused by the
political uncertainty surrounding the election result on May 6th 2010. During this time of political
and economic uncertainty investors were wary of UK investments as they will be eagerly
awaiting the outcome of the polls. This was due to the fact that Political elections bring
uncertainty and lack of confidence which results in a slowdown of investment ( Torfx,2010).
Adam Solomon claimed that “the Pound is declining over the composition of the government
and this may unsettle financial markets” (Torfx, 2010).
The uncertainty surrounded the political arrangement as it seemed the likely result of the
elections would be a hung parliament. Consequently, investors could not forecast economic
policies that would be set by the coalition government as the Conservative Party would now have
to obtain support from the Liberal Democrats in order to pass fiscal or monitory policies. (FT,
2010).
From the period of May till October, the U.S. currency continued to show weakness. This is due
to increasing inflation rates in the U.K bringing the bank of England closer to hiking interest
rates. Also the pressure from the Federal Reserve in the United States to keep interest rates at
historically low levels has caused deflation in the US which has in turn devalued the US Dollar.
This is why the Pound gradually appreciated after the Election period against the US Dollar.
Trade is probably important
After the Election the political future became clearer as investors had an insight into which
direction the new government will pursue to economic growth. The pound is increasing in value
26

27. because the investors feel confident in the future of government policies and therefore demand
for the pound is increasing and so too does the value of the pound.
The Pound has been rising against the Dollar for the past 6 months, economists mention both
increasing confidence in UK economic predictions and worries about the US recovery have been
the reasons for this appreciation. The UK economy has experienced growth in the manufacturing
sector, data and secure bank earnings could explain why the UK economy has grown. The US
has struggled to devalue the Dollar using market forces, so it is likely that they will pursue a
second round of quantitative easing, injecting large sums of currency in to the economy to
increase supply and weaken the currency. (BBC, 2010).
The merits of appreciation and depreciation
There are many merits associated with a strong currency and a weak currency. The Pound had
been regarded as a strong currency in recent years prior to the 2008 Global economic downturn,
(BBC, 2010). However, although once valued at over $2, the pound has depreciated against the
Dollar. The merits of having a stronger currency than a nation from whom you import goods
from means imports are cheaper as the Pound will buy more of the foreign currency needed to
purchase the imports. (Hill, 2007). The UK is mainly an importer of consumer products.
Therefore the standard of living would improve for UK residents as with cheaper imports and
already low exchange rates, consumers will feel confident in buying cheap consumer products
that will in turn stimulate the economy. Once equilibrium is re-established in the economy the
government could increase inflation to curb any excessive growth levels and increase taxes to
reduce the trade deficit.
Britain is predominantly an exporter of services rather than products and operates with a trade
deficit. Foreign countries will pay for imported insurance and other financial sector services
provided by the UK. The implications of a weak currency would benefit the British economy as
it would allow more importers of financial services a chance to buy from the UK as the foreign
currency would purchase more British Pounds. This would further stimulate the economy and
27

28. also attract foreign investments. Property in the UK is widely accepted to be a stable industry,
(FT, 2010). Although there was a price crash post recession, many economists believe the
industry will gain momentum quickly and house prices will rise soon. This will attract a wealth
of investors looking to take advantage of the weak pound and buy property in the UK.
Conclusion:
In conclusion after many fluctuations the pound has weakened slightly against the US Dollar.
The reasons for these fluctuations have been attributed to the recent elections held in the UK as
well as speculation regarding future growth in the US. During the political instability of May
2010, when it was unclear which government would lead Britain for the next 4 years, many
investors were unwilling to invest in the UK.
The Pound then began to appreciate against the Dollar as further speculation arose regarding the
US economies underperformance. This lead to concern as with low levels of growth and
mounting trade deficits in the US investors were not confident in their economy.
There are many merits for an appreciating and depreciating currency in today’s environment. As
Britain is an importing nation with large trade deficits, consumers would be able to take
advantage of their strong currency with imports. However, many nations are trying to weaken
their currency in order to restore equilibrium in the economy. With a weak currency Britain will
be able to export more financial services and in turn naturally stimulate the domestic economy
emerging out of the recession.
Conclusion:
28

29. This report has explained the central importance of competitive devaluation. It further
discussed how several economies were affected from the ongoing “currency wars”. The
Currency changes of United States, Japan, China, United Kingdom and Turkey have been
examined over the past 12 months to determine how these countries were being affected by
the currency war. In addition, it also determines the reaction of these countries to the
governmental interventions from the leading economies of the world.
The deliberate devaluation of the currencies of trade surplus countries such as China has
resulted in a “currency war” between major world economies. On the basis of the evidence
explored in this report, it could be suggested that the United States government have used
the monetary policy of “quantitative easing” to deliberately devaluate the value of the US
dollar in response to this global concern, in order to stage a recovery from the sharp
decline of exports in the United States. Based on the findings it seems that the Chinese
government’s efforts to slow down the effects of the US governments growing trend of
protectionism, which led to a dramatic appreciation in the Chinese currency, is futile;
particularly because China’s exports to USA is a significant part of the Chinese economy.
It was also realized that the case of Japan’s currency appreciation was somewhat dicey as
Japan has internal factors such as deflation and staggered internal growth to deal with.
Notwithstanding these peculiarities, the Yen has been adversely affected by the devaluation
of the dollar which is in reaction to the low value of the Chinese RMB.
Apart from these three directly integrated major economies, the US government’s policies
to deliberately devaluate the value of the US dollar has also affected the UK and Turkish
economies. Based on further findings, both UK and Turkish economies reacted to the US
dollars depreciation after May 2010, with appreciation. In addition to USA’s devaluation
policies the Turkish government and central bank have had some influence on the Turkish
Lira’s appreciation from the policies which they have passed on regarding growth rate and
trade. Turkey, in all nations examined, is the only nation which is attempting to revalue its
currency. The reason of appreciation of the Pound on the other hand, according the views
29

30. of some economists, is mainly because of the recovery from the political instability that
Britain has suffered. However, it is discussed that the devaluation of the US Dollar has
accelerated the appreciation of the Pound considerably.
The span of the currency wars is not easing to predict, especially when the slow growth of
the developed world is taken into account. The economic rivalries between nations are
resulting in furious interventions from the central banks of emerging economies around the
globe such as Brazil, Switzerland and China. They share the same goal: weakening their
currencies. A Stanford economist, John B Taylor said “The United States has an
important role in the world economy to maintain stability and confidence in the dollar”. It
is still uncertain whether how the world will react to the instability of the USD.
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