Wednesday, April 18, 2007
Pound reaches 26-year dollar high
Sterling has risen to its highest level against the dollar since 1981, breaking through the $2.010 mark. The currency rose above $2 on Tuesday after unexpectedly high UK inflation figures indicated further interest rate rises were likely. Consumer price inflation hit 3.1% in March, said the Office for National Statistics. Official figures also showed that average earnings rose at an annual rate of 4.6% over the three months to February, which is the fastest rate for almost three years.
Sterling has risen to its highest level against the dollar since 1981, breaking through the $2.010 mark. The currency rose above $2 on Tuesday after unexpectedly high UK inflation figures indicated further interest rate rises were likely. Consumer price inflation hit 3.1% in March, said the Office for National Statistics. Official figures also showed that average earnings rose at an annual rate of 4.6% over the three months to February, which is the fastest rate for almost three years.
For the first time, the Bank of England governor has had to write a letter explaining why inflation has climbed.
Read the full stories at:
On the appreciation of the pound:
http://news.bbc.co.uk/1/hi/business/6566715.stm
On the eminent rate hike as inflation jumps:
http://news.bbc.co.uk/1/hi/business/6562723.stm
On pay settlements “edging back up”:
http://news.bbc.co.uk/1/hi/business/6551829.stm
The above mentioned events illustrate the interdependence of the economic system, in particular between the goods, financial, foreign exchange and labour markets.
Following the announcement of an inflation rate that was higher than the official 2% target (which arose mainly due to energy price swings), expectations of higher UK interest rates increased the demand for the pound as investors looked to buy into assets that offered higher yields.
Investors expect an increase in the future UK interest rate, as the higher borrowing costs are likely to act as a tax on consumers, boosting loan repayment costs, taking money out of their pockets and slowing the rate at which they spend and take on extra financing.
In turn, while the stronger pound has been good news for British visitors to the US, it makes life more difficult for exporters, as the appreciation increases the price of British goods abroad.
At the same time, in the face of news that average pay settlements in the UK edged up in the first three months of this year, the Bank of England is further concerned that the current rate of inflation will encourage workers to press for higher wage settlements, which would create more inflation.
The much acclaimed new interactive learning package LiveEcon can help you undertand the economics behind these important policy events. For instance, Chapters 13 and 16 at intermediate level examine the workings of the foreign exchange market and the interaction between the labour market and the price level. Chapters 6 and 11 at principles and intermediate level, respectively, also illustrate how the interest rate is determined in the money market. Find out how to get LiveEcon at http://www.liveecon.com/. Download this blog as a Blogcast via the website.
The much acclaimed new interactive learning package LiveEcon can help you undertand the economics behind these important policy events. For instance, Chapters 13 and 16 at intermediate level examine the workings of the foreign exchange market and the interaction between the labour market and the price level. Chapters 6 and 11 at principles and intermediate level, respectively, also illustrate how the interest rate is determined in the money market. Find out how to get LiveEcon at http://www.liveecon.com/. Download this blog as a Blogcast via the website.
# posted by Kostas @ 19:10 
