EXCHANGE RATES PROFESSIONAL ENGLISH IN USE FOR FINANCE

 

PROFESSIONAL ENGLISH IN USE FOR FINANCE 44. EXCHANGE RATES

 

A Why exchange rates change An exchange rate is the price at which one currency can be exchanged for another (e.g. how many yen are needed to buy a euro). In theory, exchange rates should be at the level that gives purchasing power parity (PPP). This means that the cost of a given selection of goods and services (e.g. a loaf of bread, a kilowatt of electricity) would be the same in different countries. B Fixed and floating rates For 25 years after World War II, the levels of major currencies were determined by the governments. They were fixed or pegged against the US dollar (e.g. from 1946-67, one pound was worth $2.80), and the dollar was pegged against gold. One dollar was worth one thirty-fifth of an ounce of gold, and the US Federal Reserve guaranteed that they could exchange an ounce of gold for $35. This system was known as gold convertibility. C Government intervention Governments and central banks sometimes try to change the value of their currency. They intervene in exchange markets, using foreign currency reserves to buy their own currency – in order to raise its value – or selling to lower it. The resulting rates are known as managed floating exchange rates. But speculators generally have a lot more money than a government has in its reserves of foreign currency, so central banks or governments only have limited power to influence exchange rates. EXERCISES 44.1 Are the following statements true or false? Find reasons for your answers in A and B opposite. 1 Purchasing power parity is a theory that doesn’t apply in reality. 2 Inflation should lead to an increase in the value of a country’s currency. 44.2 Complete the table with words from A, B and C opposite and related forms. Put a stress mark in front of the stressed syllable in each word. The first one has been done for you. 44.3 Complete the newspaper headlines with the correct form of words from 44.2 above. 1 US inflation will cause dollar to _______, economists warn. 2 Top economists say currency undervalued, call for the government to allow it to _______ 5-10%

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