Why does it cost 2 American Dollars for every British Pound?
Is the UK Economy doing that well, or is it that the US Economy is in the dumps?
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Tagged with: dumps • economy • UK • uk economy • US
Filed under: Currencies
Neither. The relative price of currency has less to do with how the economy is doing than it does with demand for that nation’s products and expected future rates of return on investments in that nation’s currency.
Granted, if a nation is crashing horrifically, the currency generally depreciates rapidly, although you’re looking at a 70% or worse depreciation value.
The $2 mark is a psychological barrier only; in reality, the dollar has been depreciating steadily for the last decade, even during the economic boom.
Historically, the currency exchange rate has averaged around $1.60 per pound sterling, although this has fluctuated tremendously. The dollar was strongest against the pound in February 1985 when it averaged about $1.09 to the pound, and weakest during periods of stagflation in the US (ie, $2.40 in 1980 and $2.60 in the early 1970s).
This valuation at around $2 per pound sterling does not indicate fears of inflation or recession, but rather reflects the ongoing current account deficit (ie, excess of imports over exports in the US accounting) which is a result of two factors:
1) The intense rise of consumption of Chinese goods
2) The rapid increase in consumption financed by borrowing
In order to purchase foreign goods, dollars must be exchange for foreign currency (here, renminbi) which means "selling" dollars to "buy" renminbi. The higher demand for renminbi increases its "price", which is analogous to the appreciation of the renminbi against the dollar.
A third factor may be closer trade between Britain and the EU member nations, which says less about the US than it does about the efficiencies of trade within the EU.
Don’t let the exchange rate worry you – you aren’t likely to suffer from it unless you are vacationing in Britain.
Not really an economy issue as much as the US is taking a weak dollar approach in a couple of ways. The US govt. is not buying dollars to increase the value of the dollar and is keeping real interest rates low (nominal interest rates less the inflation rate). When real interest rates are low, investors do not want to keep their money in that currency because they can earn a higher return elsewhere.