Record euro part of currency market turmoil
Friday, 13 July 2007
PARIS, July 12 (AFP): Turmoil on the foreign exchange market is rooted in problematic imbalances in the global economy and the policies of some countries in favour of weak currencies.
The euro briefly struck a record high against the US currency of 1.3787 dollars yesterday after hitting new highs against the Japanese currency above 167 yen earlier this week.
The British pound also struck its highest level in 26 years of 2.0303 dollars.
There are a number of forces in play, in particular the influence of interest rates across the world, trade imbalances, varying levels of economic growth and currency controls.
The dollar has been undermined for four years by the current account deficit of the United States and interest rates have been on hold in the country for the last year.
The euro has been boosted by rising eurozone interest rates and relatively strong economic growth compared with the US this year.
Areas with rising interest rates attract foreign exchange investors, which leads to an appreciation of the currency. Economic growth increases demand for a currency, which also strengthens its value.
The yen has been weakened by uncertainty surrounding the recovery of the Japanese economy, as well as weak inflation and extremely low interest rates of 0.50 per cent.
Speculation in the market has also led to pressure on the yen, with large amounts of money from investment funds tied up in the "carry trade."
This is the act of borrowing money in a country with low interest rates, such as Japan, and investing it in countries with higher interest rates, such as Australia, Britain or the United States.
Interest rates in the United States have been at 5.25 per cent for the last year, while in the eurozone they are at 4.00 per cent and are expected to rise further in early September. The Bank of England is expected to raise its main interest rate to 6.00 per cent from 5.75 per cent before the end of 2007.
The euro briefly struck a record high against the US currency of 1.3787 dollars yesterday after hitting new highs against the Japanese currency above 167 yen earlier this week.
The British pound also struck its highest level in 26 years of 2.0303 dollars.
There are a number of forces in play, in particular the influence of interest rates across the world, trade imbalances, varying levels of economic growth and currency controls.
The dollar has been undermined for four years by the current account deficit of the United States and interest rates have been on hold in the country for the last year.
The euro has been boosted by rising eurozone interest rates and relatively strong economic growth compared with the US this year.
Areas with rising interest rates attract foreign exchange investors, which leads to an appreciation of the currency. Economic growth increases demand for a currency, which also strengthens its value.
The yen has been weakened by uncertainty surrounding the recovery of the Japanese economy, as well as weak inflation and extremely low interest rates of 0.50 per cent.
Speculation in the market has also led to pressure on the yen, with large amounts of money from investment funds tied up in the "carry trade."
This is the act of borrowing money in a country with low interest rates, such as Japan, and investing it in countries with higher interest rates, such as Australia, Britain or the United States.
Interest rates in the United States have been at 5.25 per cent for the last year, while in the eurozone they are at 4.00 per cent and are expected to rise further in early September. The Bank of England is expected to raise its main interest rate to 6.00 per cent from 5.75 per cent before the end of 2007.