Currencies hit the Headlines

Two currency movements are in the news today. Firstly the pound has fallen to an eleven year low against the Euro with one Euro now worth eighty pence. The second currency hitting the headlines is the Chinese renminbi which has appreciated beyond Rmb7 to the US dollar for the first time since 1994.

Sterling and the Euro

Sterling has depreciated by more than seventeen per cent over the last year, that is a bigger fall in the value of the currency than happened when the pound was devalued on the 16th September 1992 (Black Wednesday). A cheaper currency is naturally decent enws for our export sector and should provide some support to the economy as other components of aggregate demand weaken (notably consumer spending). But a falling currency also risks creating further inflationary pressures because the prices of imported goods and services from Euro Zone countries increase.

The Renminbi and the US dollar

In July 2005 the Chinese authorities released the renminbi from a fixed exchange rate peg against the dollar and they have let it is rise very slowly under a managed exchange rate system. Yesterday, the People’s Bank of China, the central bank, fixed the renminbi’s daily mid-point at Rmb6.9920 per dollar before currency traders edged it yet higher in the FX market. The renminbi has now appreciated in value by 4 per cent against the US dollar since the start of 2008.

Why is China seemingly prepared to countenance a steeper appreciation in the value of its currency? Several forces are at play.

(1) Inflation is at an 11-year high and real GDP growth continues to expand by more than 11 per cent a year. A rising currency should help to keep the lid on imported inflation and also soften the growth of aggregate demand - China is giving greater importance to sustainable growth and the currency is a useful instrument of macroeconomic policy in achieving this

(2) Trade tensions: The enormous trade surpluses that China runs with many advanced nations has been and remains a major source of contention. Many politicians in United States say the renminbi is undervalued, giving Chinese exporters unfair advantages. and there is an underlying pressure within the United States to introduce protectionist measures unless the Chinese allow a faster and larger appreciation of the currency to bring about a re-balancing of trade.

Of these two factors, overwhelmingly the biggest fear for the Chinese is the surge in consumer price inflation especially because of the social and political problems that an acceleration of prices is having notably in rural areas and in its effects on the urban poor.

And whilst the renminbi has been rising against the US dollar, it has been falling against other currencies - including the Japanese Yen. So the overall effect of currency movements for the Chinese economy is not as large as it might seem. That said, the Chinese authorities are now belated realising that the condition of their domestic economy makes an appreciation of the currency the right macroeconomic tool to employ as a means of managing demand and price pressures.

Unit 2 Macro: Evaluation on Supply-Side Policies [21 May 2012]
Unit 2 Macro: Migration and the UK Economy [20 May 2012]
Unit 2 Macro: Measuring Inflation in the UK [20 May 2012]
Unit 2 Macro: Real Interest Rates [20 May 2012]
Q&A: What do we need to know about output gaps? [20 May 2012]
Unit 2 Macro: The Output Gap [20 May 2012]
Revision notes on unemployment [20 May 2012]
Unit 2 Macro: Bank Cuts UK growth Forecast for 2012 [16 May 2012]
Grexit - Andrew Balls on Greece and the Euro [16 May 2012]
Unit 2 Macro: Revision Notes on Supply-side Policies [10 May 2012]
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F585: Recent Articles of Relevance [6 May 2012]
Unit 2 Macro: Exchange Rates Glossary [5 May 2012]
Unit 2 Macro: Growth and Development Glossary [5 May 2012]
Unit 2 Macro: Monetary Policy and Inflation Glossary [5 May 2012]
Unit 2 Macro: Trade and Balance of Payments Glossary [5 May 2012]
Unit 2 Macro: Aggregate Demand Glossary [5 May 2012]
Macro Revision - Key Statistics on the UK Economy [4 May 2012]
Macro Revision: Putting Things in Context [29 Apr 2012]
Unit 4 Macro: The Euro Zone Crisis (Revision) [22 Apr 2012]
Unit 3 Micro: The Third Industrial Revolution [20 Apr 2012]
Unit 2 Macro: Globalisation and the Growth of Ports [10 Apr 2012]
Unit 2 Macro: Inflation and the Business Environment [6 Apr 2012]
Unit 2 Macro: The UK Balance of Payments in 2011 [4 Apr 2012]
Unit 2 Macro: Revision on Interest Rates and the Exchange Rate [3 Apr 2012]
Unit 4 Macro: Productivity Improvements in China [3 Apr 2012]
Unit 4 Macro: Floating and Managed Floating Exchange Rates [2 Apr 2012]
Unit 2 Macro: Revision on Real Economic Data [2 Apr 2012]
Unit 2 Macro: Revision on Real Disposable Income [2 Apr 2012]
Unit 4 Macro: Pain in Spain as Fiscal Austerity Bites [1 Apr 2012]
Posen on slower growth in the UK compared to the USA [30 Mar 2012]
Unit 3 Micro: EU Imposes Further Price Cap on Mobile Phone Companies [29 Mar 2012]
Global Economy- the 2012 BRICS Summit [28 Mar 2012]
Life in the Slow Lane - UK Growth in 2011 Lags the Euro Area [28 Mar 2012]
George Buckley at the Millfield Economics Society [28 Mar 2012]
Beyond the Bike - Monetary Policy in Africa [28 Mar 2012]
OCR A2 Economics Unit F585 The Global Economy June 2012 [27 Mar 2012]
Unit 4 Macro: Evaluating 3 Years of Quantitative Easing [27 Mar 2012]
Solar Panels and Tariffs [21 Mar 2012]
Unit 4 Macro: Video Resources on the Euro Crisis [10 Mar 2012]
Evidence of the dangers of protectionism [9 Mar 2012]
Unit 4 Macro: Enlarging the EU [9 Mar 2012]
Unit 2 Macro: Policies to Drive Economic Recovery [9 Mar 2012]
Unit 2 Macro: News Videos on the German Economy [9 Mar 2012]
Unit 2 Macro: Might Oil Prices Bring another Recession? [4 Mar 2012]
Economies hooked on central bank stimulants? [4 Mar 2012]
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Unit 2 Macro: Rosling on China and the UK Converging [24 Feb 2012]
Pinterest: Board on Developments in the EU Economy [19 Feb 2012]
Unit 4 Macro: King on the UK Economy [15 Feb 2012]
Unit 2 Macro: China’s Trade Engine is Spluttering [10 Feb 2012]
Martin Wolf on Global Shocks [10 Feb 2012]
Trucks are the new way of measuring debt [1 Feb 2012]
Unit 2 Macro: Signs of Progress for Zimbabwe [29 Jan 2012]
Unit 2 Macro: Focus on China - Trade and Growth [27 Jan 2012]
Unit 2 Macro: Focus on China - Inflation [26 Jan 2012]
Unit 2 Macro: Focus on China - Carbon Emissions and Growth [26 Jan 2012]
Unit 2 Macro: Focus on China - Per Capita Incomes [26 Jan 2012]
Unit 2 Macro: Focus on China - Changing Economic Structure [26 Jan 2012]
Unit 2 Macro: Can China Stay Competitive [25 Jan 2012]
Unit 2 Macro: Population Shift in China [23 Jan 2012]
Unit 2 Macro: Exporting to the Booming Chinese Economy [23 Jan 2012]
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Inflation - what’s up, what’s down and what’s going to happen next [17 Jan 2012]
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Unit 2 Macro: Look Upwards to Find the next Downturn [15 Jan 2012]
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Unit 2 Macro: Quantitative Easing in the UK [8 Jan 2012]
Unit 1 Micro: Low Cost Airlines Beat the Recession [1 Jan 2012]
Unit 4 Macro: Exchange Rate Economics - Where next for the US Dollar? [31 Dec 2011]
European Economics: Resources on the CAP [28 Dec 2011]
Unit 2 Macro: Brazil Overtakes UK in Economic Size [26 Dec 2011]
The Eurozone Crisis Explained (again!) [22 Dec 2011]
Rising prices and falling real incomes [13 Dec 2011]
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Jim O’Neill - The Growth Map: Economic Opportunity in the BRICs and Beyond [22 Nov 2011]
Beyond the Bike - The Value of Money [19 Nov 2011]
Unit 2 Macro: Should the EU introduce a Tobin Tax? [14 Nov 2011]
AS Macro: The State of British Business [13 Nov 2011]
Eurozone crisis - a selection of resources [12 Nov 2011]
Latest world trade data [6 Nov 2011]
Unit 4 Macro: China and India - Notes from Martin Wolf [6 Nov 2011]
Australia lowers interest rate to 4.5% [1 Nov 2011]
Can the “invisible hand” solve Africa’s poverty? [13 Oct 2011]
Unit 4 Macro: Unit Labour Costs and Inflation [12 Oct 2011]
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The Return of Protectionism? [12 Oct 2011]
Why Is Macroeconomics Such A Mess? [11 Oct 2011]
University Challenged [11 Oct 2011]
Unit 4 Macro: USA edges closer to naming China as a “Currency Manipulator” [4 Oct 2011]
AS and A2 Macro: Exchange Rates and “Safe Haven” Currencies [2 Oct 2011]
Unit 4 Macro: When China Met Africa [1 Oct 2011]
Greek debt decision tree [25 Sep 2011]
Unit 4 Macro: Greek Economy at Default’s Door [25 Sep 2011]
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