Unit 4 Macro: Exchange Rate Economics - Where next for the US Dollar?
Is the US dollar going to be knocked off its perch as the only true global currency? Professor Barry Eichengreen, the author of Exhorbitant Privelege argues that there are strong reasons to believe that the US dollars’ position in the world financial system will decline in the years ahead.
The US dollar has been for many years the world’s most powerful currencies but this power seems to be waning as other currencies rise in significance and the US economy struggles to recover from their financial and economic crisis and the fiscal challenge. Eichengreen argues that there will be three truly global currencies going forward - the dollar, the Euro and the remnimbi.
read more...»The Return of Protectionism?
The US senate has pushed through the bill which aims to punish China for allegedly undervaluing its currency. Is passed into law it would allow Washington to impose tariffs on imports in order to protect its domestic industries. The role and impacts of tariffs and other forms of protectionism form a big part of the ‘international trade’ section of most Economics courses and this article could be a good starting point for those discussions.
Unit 4 Macro: USA edges closer to naming China as a “Currency Manipulator”
The U.S came closer to finally calling the Chinese a currency manipulator and retaliating in the new round of protectionism fears. A good summary of the key issues here.
Zondle Game: Currencies of the World
Here is a ten question quiz using Zondle focusing on currencies around the world.
read more...»Chinese inward investment in the London property market
In mainland China, authorities have put restrictions on property speculators to dampen the market, while in Hong Kong prices have risen by 70% in less than two years. But the 25% depreciation of sterling over the last two years makes the London property market a real draw for property investors from China. Sky News reports that one in three of buyers of new properties in London come from China and Hong Kong, mainly in the £400,000 - £1mn bracket, either seeking accommodation for their children studying in London or simply an investment. If - or when - the sterling/dollar exchange rate recovers, their return will be enhanced by the increased return they could get when they take their money out of the UK market again.
read more...»Government boost for UK trade
“The only way”, says William Hague, “to increase our national prosperity and secure our growth for our economy, is through trade, and our Embassies play a vital role in supporting British business.” Therefore the Foreign Office announced today that they are opening five new Embassies and many Consulates, from China and India to El Salvador and South Sudan. This two minute clip from the Foreign Secretary’s speech to the House of Commons today could make a good lesson starter for a revision session on trade, the capital account, comparative advantage, government intervention for competitive advantage, and so on.
International Economic Indicators
I am encouraging my A2 pupils to make better use of macroeconomic data to support their points. I have found the TradingEconomics website very useful for providing an up-to-date selection of indicators for a wide range of countries.
read more...»AS Macro Key Term: Expansionary Monetary Policy
An expansionary monetary policy (also known as a relaxation of monetary policy) means an attempt to use monetary policy to boost or reflate aggregate demand, output and jobs.
Typically this involves a central bank cutting official policy interest rates. It might also involve a relaxation of credit controls and in some countries, Quantitative Easing has been used involving the creation of new money by the Central Bank to purchase debt from banks and boost their capacity to lend to individuals and businesses.
The Bank of England cut official policy rates from 5.5% in the early autumn of 2008 to 0.5% in February 2009 in a bid to stabilise confidence and demand during the descent into recession. Quantitative easing worth £200bn (or 12% of UK GDP) has also been used to provide an extra flow of funds in the UK banking system in a bid to unfreeze credit supply and support an economic recovery.
A fall (depreciation) in the exchange rate is also an expansionary monetary policy
read more...»Pacific Peso Reaches 29 Year High!
For a currency that used to have the tag of the “Pacific Peso”, these are heady days for the Australian dollar. The external value of the dollar has reached a 29-year high as the Aussie dollar continues to appreciate on the global currency markets. Our Timetric charts follow the Australian dollar against the US dollar and also sterling.
This is a good mini case study on the factors that determine the value of a currency when it is allowed to float freely in foreign exchange markets
1/ The Australian economy is growing relatively strongly - increasing the expected returns from foreign investment in the economy
2/ Policy interest rates are relatively high (4.75%) - attracting inflows of hot money - short term banking flows that seek the best risk-adjusted rate of return
3/ Trade - the Australian economy has enjoyed a resurgence in the value of exports, notably from selling minerals and liquid natural gas to fast-growing developing countries in Asia
4/ Changing sentiment in the market - foreign exchange market speculators seem to be buying the Australian dollar as a safe haven investment instead of Japanese Yen
In simple terms the expected yield to investors prepared to buy Australian dollars is pretty high - for example compared to that on offer in Japan. This is causing a strong market demand for the Australian dollar
read more...»Why is the Yen appreciating?
BBC Business News has an excellent report and supporting video which assesses why the Yen has strengthened following the sad disasters besetting Japan.
An example of how financial flows impact on exchange rate volatility. The normal suspect, currency speculation, may not be the major driver here.
Or are speculators ‘gambling’ that repatriation of funds to finance reconstruction means the Yen will rise in value so ‘buy cheap, now’ and ‘sell later, dear’?
And how can the world’s central banks respond? And why?
Much to debate in class
read more...»Timetric: Currency movements against the Euro
A set of Timetric charts following currency movements for non-Euro countries against the Euro
read more...»AS Macro: What next for the pound?
This is an excellent resource for recent developments in the foreign exchange markets and discussions about where sterling might be heading next and the possible macroeconomic effects.
Mo Tanweer on Global Currency Wars
I would have to travel a long way to hear a better and more incisive talk than Mo’s talk at Fulham on Monday about the economics of currency wars. His students are lucky indeed to have such a gifted and authoritative communicator in their classroom! It was fascinating and focused on so many global economic forces that A2 macroeconomists need to have a handle on as their exams loom. Here are some brief notes taken during Mo’s talk and (at the end) a link to a pdf download of Mo’s presentation - full of fantastic supporting charts!
read more...»The US-China power balance, trade and currencies
The BBC produced a nice little graphic this week to go illustrate comparisons between the US and Chinese economies, alongside the talks between President Obama and President Hu Jintao. Relations between the two countries have been strained by issues such as the trade imbalance and China’s growing military might. The figures here give some background to those issues.
read more...»EU Economics: Estonia joins the Euro
The New Year sees the seventeenth country join the Euro with the arrival of Estonia into the single currency bloc. Read Estonians prepare to join the euro and ditch the kroon The Baltic State with just 1.3 million inhabitants experienced and then suffered an unsustainable inflationary boom in the years immediately after entering the EU in 2004 and that boom came to a spectacular end in 2008.
A Hip Hop Take on Currency Wars
A hat tip to Brian Rafferty for spotting this super hip hop take on the unspoken currency war between the United States and China. Check out the US-Sino Currency Battle!
Currency War - why and what effect is it having?
This is a great article that starts to open up some of the issues at stake with regard to the solutions to balance of payments deficits and surpluses. It also provides an excellent basis for beginning to evaluate the potential solutions. Currency devaluations create winners and losers, who are the winners and who are the losers? It also explains how governments are trying to influence the value of currencies. http://www.bbc.co.uk/news/business-11608719”
Currencies in the News - Two Videos
Movements in the external value of currencies have direct and indirect effects on plenty of macroeconomic variables such as inflation, exports, output, profits and - ultimately - jobs. This week we have seen the Japanese central bank intervening in the foreign exchange market in an attempt to drive the value of the Yen lower. Japan is struggling to sustain a recovery after the global financial crisis and a weaker currency is seen as a vital part of the attempt to prevent another draining bout of price deflation.
And the long-running dispute between the United States and China about the alleged under-valuation of the Yuan against the US dollar continues to rumble. This BBC news video takes a swing through New Jersey to find trade unions lobbying government for more action on the exchange rate issue.
Little sign yet of a Yuan appreciation
Back in June the Chinese authorities announced that they were prepared to allow a managed withdrawal of the pegged currency against the US dollar. There has been longstanding pressure from US law-makers that an undervaleud Yuan has given China an artificial competitive advantage in international markets. And that the huge rise in her current account surplus is indicative of an exchange rate that is some distance from a long-run equilibrium level.
read more...»Yuan Rally
China has taken its first step towards honouring a pledge to let the exchange rate of its currency float more freely. Beijing announced plans on Saturday to make the yuan more flexible, breaking its strict peg to the US dollar. And on Tuesday, for the first time since the pledge, its central bank raised the centre point of the currency’s official trading band.
read more...»EU Economics: Estonia is17th member of the Euro Zone
Here is an update for revision on Euro issues. Estonia has been accepted into the Euro Zone and will join the single currency in January 2010.
Details here. Estonia is the first of the Baltic States to enter into monetary union. In macroeconomic terms it is a minnow - with economic output of 14 billion euros ($17 billion), Estonia would rank as the euro’s second-smallest economy, ahead of Malta.
A selection of revision notes on exchange rates
The gyrations of currency values in international markets can have far-reaching consequences for short term growth, inflation, employment and living standards. Exchange rates figures in both the AS and A2 macroeconomic syllabus and we have blogged about them extensively over the last year. this blog brings together a selection of articles and presentations that we hope students will find useful in their exam preparation for June 2010.
read more...»Sterling and Exports - The Importance of Time Lags
Roger Bootle has an excellent article on the lagged effects of a competitive exchange rate in today’s Telegraph. One of his arguments is that the default behaviour of many UK exporters is to take higher profit margins from their overseas sales rather than cutting their prices to boost export volumes. Crucially the impact of a lower currency takes time to show through in the international trade data and this is partly because switching production to countries where the exchange rate is favourable cannot happen overnight .... read this paragraph:
“Where export prices are not cut, this does not necessarily mean that the weaker currency will do no good. It is rather that the benefit will take longer to come through. In response to higher profit margins, firms will have more incentive to sell abroad. In the economic textbooks, selling abroad, or switching from European to Asia markets, is simply a matter of pressing a button. In reality it isn’t like this; sales networks have to be established, modifications to the products or services made; foreign relationships built up. These things do not happen overnight.”
The article reminds us that a more competitive exchange rate helps to re-balance the economy at a time of domestic weakness. But that the benefits of a weaker pound have been diluted by
(i) Supply-side weakness in UK industries (e.g. a lack of some aspects of non-price competitiveness)
(ii) Low demand in key export markets - not least the European Union
(iii) Longer than expected time lags between a fall in the currency and a pick up in export sales
Many exporters have also been held back by problems in accessing trade credit - few importers pay in advance for goods and services sold overseas!
More of the Roger Bootle article can be found here: The competitive pound is one of the few things we have got going for us
AS Macro: Sterling and the UK Economy
This is an updated version of a previous blog post on the macroeconomics of a weaker exchange rate - perhaps important for the AS macro paper on June 7th.
The Bank of England - which is the UK’s central bank - estimates that the pound has depreciated by around 25pc against a basket of other currencies such as the euro and the US dollar since mid-2007. And in 2008-09, sterling registered an even larger depreciation against the dollar than its 1992 exit from the European Exchange Rate Mechanism. In trade-weighted terms, the decline was the biggest since figures were first calculated in the early 1980s.
The fall in the external value of the pound has many possible consequences for an open economy such as the UK. At AS level it is important to identify these effects and explain them concisely using an AD-AS framework. Then support your answer with some good evaluation points and (where possible) supporting evidence.
read more...»Spain adds to the Euro’s woes…
As if having Greece going into meltdown was not enough for the euro currency to shoulder, Spain yesterday added to this burden… the Spanish government was forced to rescue one of its biggest regional banks: the central bank has taken operational control of Cajasur, which needs an urgent cash injection of €500m.
There has been a fresh bout of horizontal integrations announced in a bit to make their balance sheets more stable - Caja Mediterraneo, Grupo Cajastur, Caja Extremadura and Caja Cantabria want to form a bank with €135 billion in assets, to make it the country’s 5th largest lender.
This is all a time when the IMF has just delivered a bearish analysis on the Spanish economy:
“The challenges are severe: a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness,” the report said.
Do troubles for the euro know no end…?
A2 Economics Revision - Data Description Revision on BoP
Just as with your AS exams from one year ago, AQA unit 4 macro papers contain data response questions and the first part involves drawing evidence from statistics either in table or chart format - a good example is the one above which tracks the current account balances for the UK and the USA from 1995 onwards. Note that 2010 and 2011 are labelled as forecasts - always something to pick up on when writing about the data in your answer.
read more...»AS / A2 Revision - Where Next for the UK Economy?
Students wanting to demonstrate up-to-date understanding of the UK economy should find this streamed revision presentation really useful. It was delivered by Geoff at our AS & A2 Economics workshops in London & Manchester. It provides a comprehensive coverage of recent developments in the UK economy and highlights some potential downsides and upsides as the economy attempts to sustain a recovery during 2010 and 2011. Has the era of macro economic stability been replaced by a new phase of macro economic uncertainty, slower growth and a recovery constrained by debt? Or are there grounds for being more optimistic about the near-term future for the British economy?
Revision Presentation on the UK Economy
Contagion spreads…
After Greek’s junk status downgrade yesterday, as well as Portugal’s downgrade; S&P today downgraded one of the other PIIGS, Spain as the contagion effect takes hold… Last night’s (Wednesday) Newsnight discussed the potential contagion ( from 27 minutes).
With Spain’s economy making up 8.5% of the EU GDP, this downgrade has bigger consequences than Greece’s.
Could the UK be next?
Greek junk status timeline
This informative interactive graphic from the FT shows the rapid rise in Greek government yields over the past year, resulting in yesterday’s downgrade to junk status.
When S&P warns holders of Greek debt that they only had an “average chance” of between 30% and 50% of getting their money back in the event of a debt restructuring or default, its going to have consequences…
One result of going junk (or sub-investment grade…) is that many financial institutions (including pension funds) are not allowed to hold such investment instruments, which will lead to a big sell-off of these, causing the yields to rise further.
As the fears of contagion spread, Portugal was also downgraded and the Vix index, a measure of “fear” in the US stock market, rose by more than 30 per cent, its biggest one-day jump since the height of the financial crisis in October 2008.
The moves highlighted the potential that the Greek crisis – the result of too large a debt load and expectations that it may default or have to restructure that debt – could spread and have knock-on effects on the global economy.
In this month’s edition of Economax, there is an in-depth article on Greece’s fiscal crisis.
RES Competition: A New World Currency?
This issue has become highly topical in the wake of the global financial crisis and increasing claims that countries are manipulating the external value of their currency as a way of restoring or maintaining competitiveness in the world economy. The judges are looking forward to some incisive and challenging views on the issue from students choosing this question!
There is no doubt that currencies matter - and this essay invites students to discuss the role that a currency plays and whether the global village would be better off with a single currency presumably issued by a unified world central bank. For decades the US dollar has been a reserve currency and there is a lively debate at the moment about whether a new reserve currency is required either in place or or to accompany the US dollar.
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