12. As a result of the Brexit vote (the United Kingdom\'s vote to leave the Euro
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12. As a result of the Brexit vote (the United Kingdom's vote to leave the European Union), the pound sterling has weakened. It reached a 31-year low against the US dollar. From 23 June 2016 to July 2016 it depreciated by 12.9% against the US dollar, 10.7% against the euro and 17.0% against the yen. The trade-weighted sterling exchange rate index depreciated by 11.6%. 1.55 1.50 1 .45 1.40 1.35 1.30 1.25 1.20 Euro 1.15 92 90 86 84 82 80 78 76 2 -Dollar Index (1/1/05 = 100) Jan-16 Mar-16 Jul-16 May-16 Sterling exchange rates (a) Why has the pound depreciated by differeht amounts against different currencies? (2 points) (b) What are likely to be the effects on the financial and current accounts of the UK's balance of payments? 4 points) (c) Monetary policy tends to affect the value of a nation's currency. Few days ago the Bank of England raised the interest rate from 0.25% to 0.5%, the first increase in 10 years. Using a diagram of the of the foreign exchange market for the sterling pound (relative to the dollar), explain how might the rise in the interest rate impact on the sterling exchange rate against the dollar (3 points)Explanation / Answer
The pound has fallen against a basket of other currencies. Here's why it happened, what it means, and whether Britain should be braced for further falls. The value of pound is influenced by various factors, including growth,interest rate and inflation.Robust economies tend to have stronger currencies because investors plough money into the countries in which they will strongly grow in the near future.They need local currencies to make these investments and increase in demand of sterling’s pushes up its value.The opposite is true for weaker economies.Last December,decisions by the US Federeal Reserve to increase interest rate pushes up the dollar. months ahead of the move, investors expected the Bank of England would follow the Fed and tighten policy shortly after. This helped the pound to stay relatively strong against a basket of other currencies. Expectations that the Fed will raise rates at a relatively faster pace than the UK are also expected to drive the pound lower against the dollar.Predicting currency movements is very difficult. But with June's referendum around the corner and a number of headwinds facing the global economy, it's likely to be a bumpy ride.
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