Devaluation and salvation?

The exchange rate is big news at the moment and it is worth following closely since changes in the external value of a currency can have significant effects on prices, export and domestic demand, jobs and the rate of economic growth.

As with most topics in AS macro, think about causation, consequences and whether changes to macroeconomic policies through intervention can and should seek to make a difference.

Larry Elliott in the Guardian considers whether the devaluation of sterling against the Euro could be a saving grace for the economy. And there is a neat interactive graphic showing what has been happening to the pound’s value against the Euro Area currency.

The Times reports on sterling’s weakness and suggests that falling overseas demand for UK denominated shares is one factor driving the currency lower. Britain is expected to suffer a deeper recession than most of the leading advanced economies and this will impact on profits and dividends from UK businesses largely dependent on the health of the UK economy.

The Financial Times reports on the rise of the Euro as a reserve currency

“There are now more euros in circulation than dollars, and the euro’s role as an international reserve currency is growing. By the first half of this year, the euro accounted for 27 per cent of official foreign reserves, up from 18 per cent soon after its launch. The dollar’s share fell from 71.2 per cent to 62.5 per cent during the same period.”

Reserve currency status is an important factor driving demand for a currency – sterling seems to have lost its much vaunted safe-haven status among international investors and this is another reason behind the steep depreciation of recent weeks and months.

Will the government (through the Bank of England) intervene in the currency markets to help stabilise the value of the pound against the Euro?

Not if you believe the public statements of Treasury Minister Yvette Cooper who is reported in the Independent as saying that the value of the pound was not a top priority for the government implying that the pound would be left to find its own market level. In an interview on the BBC radio 4 Today programme she is quoted as saying:

“We’ve never had a policy of targeting the pound. Our policy is to target inflation. And that I think has been the right one.”

Regular articles on the economics of exchange rates appear on my blog here: