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Unit 2 Macro: Exchange Rates Glossary
5th May 2012
A short glossary covering concepts relevant to exchange rate economics
Data from Timetric.
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United Kingdom from Timetric
Appreciation
When the value of an asset or exchange rate increases in value relative to another
Clean float
A currency exchange rate that varies (or floats) according to market forces, free from intervention by a country’s central bank
Competitive devaluation
When a country tries to devalue its currency to increase its competitiveness. However, this often encourages other countries to also devalue leading to only temporary increases in the competitiveness of exports.
Currency union
A group of countries (or regions) using a common currency – for example the 17 countries that have entered the single European currency since it started in 2001
Depreciation
A fall in the market value of one exchange rate against another
Fixed exchange rate
An exchange rate that is fixed against other major currencies through action by governments or central banks, usually within small margins of fluctuation around the central rate. Likely to involve periodic intervention in the foreign exchange market by one or more central banks to buy or sell the currency in question if it moves below or above its margins
Foreign exchange reserves
The reserves of gold or foreign currencies (e.g. US dollars or Euros) typically held by central banks on behalf of their national government
Hot Money
Money that flows freely around the world looking to earn the best available rate of return. It might be invested in any asset whose value is expected to rise (e.g. property or shares) or placed in an account offering the best real rate of interest.
Managed floating currency
An exchange rate that is basically floating but subject to intervention from time to time by the monetary authorities, in order to resist fluctuations that they consider to be undesirable
Reserve currency
A foreign currency that is held in countries’ official reserves because of its global importance as a medium of exchange and its inherent stability
Special drawing rights
A unit of money created by the IMF. Each member country can borrow SDRs at favourable interest rates from the IMF’s reserves when they are needed for reasons related to a country’s balance of payments
Sterling exchange rate index
The external value of sterling in the foreign exchange market calculated using a weighted index of a basket of currencies – weightings are based on the percentage of trade between the UK and other countries.
Data from Timetric.
To view this graph, please install Adobe Flash Player.
United Kingdom from Timetric
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.