ECON 7044 International Finance | Interest Rate of the USA

GBP vs USD

Between GBP and USD, the value of USD appreciated over the last ten years, while on the other hand, the value of GBP reduced. It is important to note that the trend of interest rate between the two nations has been different (Bankofengland.co.uk. 2018). While the interest rate in the UK decreased over the time from 5.8% in the year 2008 to 0.2% in the year 2017, the interest rate in the US has increased since the year 2014.

Figure 1: The interest rate of the USA

(Source: Developed by the learner)

Another important factor that has helped the US dollar to appreciate in value is the higher GDP growth rate compared to that of the UK. While the UK has shown a GDP growth rate of around 0.2% per year, the US economy has seen a growth rate of around 4.1% per year. Consequently, the export demand for the US has increased more than that of the UK which has influenced the value of the two currencies over the years.

Figure 2: The GDP growth rate of the UK

(Source: Developed by the learner )

Lastly, the impacts of different export and import strategies of the economy have also been reflected in the values of the two currencies. The government of the USA has a more liberal import-export strategy that allows more flexibility to the value of the currency. Federalreserve.gov. (2018) stated that the exported products of the USA have experienced higher demand that in turn influenced the value of the US currency over the years.

Euro vs USD

Since the start of the year 2018, the value of Euro has depreciated while on the other hand, the value of the US dollar has appreciated. One of the biggest factors that have made the difference between the values of the currency is the interest rates. In the Euro area, the interest rate is very low for a long period of time. The current interest rate in the Euro area is 0% compared to 4% in the US. Europa.eu. (2018) highlighted that higher interest rate discourages import which in turn increases the net export of the economy. This has influenced the demand for the US currency and hence its value has increased.

Figure 3: The interest rate in the Euro area

(Source: Developed by the learner )

Additionally, the GDP growth rate between the USA and the euro area has also been different for a long period of time. The export volume corresponding to low GDP growth of the euro area resulted in a constant demand for euro currency resulting in depreciation in the relative value.

Furthermore, the inflation has also a crucial role to play in the relative values of the currencies. The inflation rate is more in the Euro area compared to that of the US. As a result, the goods and the services of the Euro area have become costly which in turn has reduced the demand for euro relative to the US dollars (Data.worldbank.org. 2018) the customers are more likely to buy goods from US leading to an increase in the demand for US currency.

References

Bankofengland.co.uk. 2018, M., Report..., A., Q2, A., United..., B. and Kingdom, B. (2018). Home Bankofengland.co.uk. Available at: https://www.bankofengland.co.uk/ [Accessed 10 Aug. 2018].

Europa.eu. (2018). European Central Bank. European Central Bank. Available at: https://www.ecb.europa.eu/home/html/index.en.html [Accessed 10 Aug. 2018].

Federalreserve.gov. (2018). The Fed - Home. Available at: https://www.federalreserve.gov/ [Accessed 10 Aug. 2018].

Data.worldbank.org. (2018). World Bank Open Data | Data. Available at: https://data.worldbank.org [Accessed 10 Aug. 2018].