Exchange rate history

The exchange rate between two currencies is the price of one in terms of the other, for example, if it costs $1.50 to buy £1.00 then the exchange rate  will be £1.00 = $1.50.

 

The UK has followed a number of different exchange rate systems since the 2nd World War:

  • 1944-72: Fixed exchange rates, but there were devaluations against dollar in 1948 and 1967.
  • 1972-87: Managed floating exchange rates
  • 1987-88: Shadowing the deutschemark.
  • 1988-90: Managed floating in the run up to joining the exchange rate mechanism.
  • 1990-92: Semi fixed exchange rates.
  • 1992-today: Floating exchange rates.

 

This chapter will explain the different types of exchange rate system and European Monetary Union.

 

Historical Movements in Exchange Rates

Slide1

Describe the changes in the exchange rate in the above chart.

 

Slide2

 

Describe the changes in the exchange rate in the above chart.

 

 

 

 

Slide3

Describe the changes in the exchange rate in the above chart.

 

 

 

 

 

Trade weighted index

The trade weighted index is used to compare a country’s exchange rate against its major trading partners.  The weight for each foreign currency is equal to its share in trade.  The Bank of England publishes data for the pound called the Exchange Rate Index (ERI).

 Slide4

Describe the changes in Sterling’s ERI.

 

 

 

 

Was the recent decline in the ERI expected?  What is the evidence to support this view?

 

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