BUS325 : International Finance : Value of GBP Depreciates
Question:
Currencies GBP/USD and EUR/USD. With your understanding of the theories learnt in Topic 1 – 4 and justify your reasons on how you want to restructure your portfolio.
Here are the specific questions that you need to answer for your revised market view:
- You are expected to apply the theories that they have learnt from Topics 1, 2, 3 and 4 in the revised market view to explain the exchange rate fluctuation
- You should state on how they might restructure their portfolio using the theories
Answer:
The pair of GBP/USD tells the people the amount of US dollars needed to purchase one British pound. The GBP/USD is the abbreviation for the Great Britain pound and United States dollar currency pair. It has been found out that as the value of USD appreciates when the value of GBP depreciates. T
he trend of interest rate between the United States and the Great Britain as been quite different. The database from Bank of England shows that the interest rate in the United Kingdom decreased over the time from 5.25% to 0.75% from the year 2008 to 2018 (Verdelhan 2018). The spot rate of GBP/USD was also seen fluctuating a little. Due to the presence of business cycle, the exchange rate will revive itself and there will be a rise in the exchange rate. When the growth rate of gross domestic product of the United Kingdom was 0.2% every year and on the other hand, the economy of the United States also have growth rate of 4.1% per year (Subbarao and KR 2017). The government of the USA has a quite liberal export and import policy which allows flexibility of the value of the currency.
The EUR/USD currency pair is the abbreviation for the euro and the U.S dollar for the currencies of European Union and the United States. Trading this particular currency pair is also known as trading the “euro”. The currency pair indicates the amount of US Dollars needed to purchase one euro. This indicates that when the value of Euro will depreciate, the value of US Dollar will appreciate (Fuller 2016). Both the European Union and the United States are the largest economic entities around the world. The interest rate in the European Union is very low compared to that of the United Sates. This has resulted in increase in the demand for US currency and therefore, the value has also increased. The inflation also plays an important role for the relative values of the currencies (Subbarao and KR 2017). The rate of inflation is comparatively more in the European Union than that of the United States. This results in the hike in prices of the goods and services in the Euro area.
Reference:
Fuller, G.W., 2016. Introduction. In The Great Debt Transformation (pp. 1-24). Palgrave Macmillan, New York.
Marshall, B.R., Nguyen, N.H. and Visaltanachoti, N., 2018. Bitcoin Liquidity.
Fx-exchange.com. (2018). Euro(EUR) To US Dollar(USD) History - Foreign Currency Exchange Rates and Currency Converter Calculator. [online] Available at: https://www.fx-exchange.com/eur/usd-exchange-rates-history.html [Accessed 12 Sep. 2018].
Subbarao, N. and KR, L., 2017. An Empirical Analysis of the Relationship between Currency Futures and Currency, Exchange Rate, Economical Formulas, Prediction Models and Volatility in India with Reference to US Dollar, Great Britain Pound and Euro Currency.
Verdelhan, A., 2018. The share of systematic variation in bilateral exchange rates. The Journal of Finance, 73(1), pp.375-418.
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