EECS 1710 Lecture Notes - Lecture 13: Pound Sterling
24 Jun 2018
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EECS 1710 Lecture 13 Notes
Introduction
Influence of Factors across Multiple Currency Markets
The inflationary changes are expected to have little direct impact on the yen because of
the assumed infrequent trade between the two countries.
Capital flows have become larger over time and can easily overwhelm trade flows.
For this reason, the relationship between the factors (such as inflation and income) that
affect trade and exchange rates is sometimes weaker than expected.
An understanding of exchange rate equilibrium does not guarantee accurate forecasts
of future exchange rates
Because that will depend in part on how the factors that affect exchange rates change in
the future.
Even if analysts fully realize how factors influence exchange rates, they may still be
unable to predict how those factors will change.
Each exchange rate has its own market, meaning its own demand and supply conditions.
The value of the British pound in dollars is influenced by the U.S. demand for pounds
and the amount of pounds supplied to the market (by British consumers and firms) in
exchange for dollars.
The value of the Swiss franc in dollars is influenced by the U.S. demand for francs and
the amount of francs supplied to the market (by Swiss consumers and firms) in
exchange for dollars.
In some periods, most currencies move in the same direction against the dollar.
This is typically because of a particular underlying factor in the United States that has a
similar impact on the demand and supply conditions across all currencies in that period.
EXAMPLE
Assume that interest rates are unusually low in the United States in a particular period,
which causes U.S. firms and individual investors with excess short-term cash to invest
their cash in various foreign currencies where interest rates are higher.
Document Summary
The inflationary changes are expected to have little direct impact on the yen because of the assumed infrequent trade between the two countries. Inflationary changes are expected to have little direct impact on the yen because of the assumed infrequent trade between the two countries. Capital flows have become larger over time and can easily overwhelm trade flows. For this reason, the relationship between the factors (such as inflation and income) that affect trade and exchange rates is sometimes weaker than expected. An understanding of exchange rate equilibrium does not guarantee accurate forecasts of future exchange rates. Because that will depend in part on how the factors that affect exchange rates change in the future. Even if analysts fully realize how factors influence exchange rates, they may still be unable to predict how those factors will change. Each exchange rate has its own market, meaning its own demand and supply conditions.
