Topic: Effect of changes in exchange rates between pound and Euro on their own”

Order Description 1.has fin" rel="nofollow">inish literature review. can you help me fin" rel="nofollow">inish in" rel="nofollow">introduction and methodology. thank you. Effects of the changes in" rel="nofollow">in exchange rates between Euro and pound Introduction The term exchange rate refers to the rate at which the currency of one country is exchanged for that of another (Frenkel & Johnson 2013). Considerin" rel="nofollow">ing that the global economy is gettin" rel="nofollow">ing ever more in" rel="nofollow">integrated (Ghezzi 2013), there is a growin" rel="nofollow">ing demand for foreign currency all over the world. However, these exchange rates are consistently changin" rel="nofollow">ing because of factors like in" rel="nofollow">inflation, speculation, and in" rel="nofollow">interest rates, to mention a few. This paper reviews the literature which explores the effects of the changes in" rel="nofollow">in the exchange rates, after buildin" rel="nofollow">ing context by examin" rel="nofollow">inin" rel="nofollow">ing literature about the different aspects of exchange rate. The contextual in" rel="nofollow">information in" rel="nofollow">includes the exploration of foreign exchange regimes, types of exchange rates, and the factors which make the rates change. Literature review exchange rates The exchange rates can in" rel="nofollow">influence the economic policy of a nation on an extraordin" rel="nofollow">inary scale. For in" rel="nofollow">instance, currency appreciation can dimin" rel="nofollow">inish the measure of exports of the nation sin" rel="nofollow">ince they will be costly. Then again" rel="nofollow">in, the depreciation of a currency can make the exports of a nation less expensive and that would build their in" rel="nofollow">interest (Feenstra 2015). With the expansion in" rel="nofollow">in the in" rel="nofollow">interest for fares, aggregate supply and GPD would rise and that would lift the employment rate in" rel="nofollow">in the nation. Resultantly, there will be some development in" rel="nofollow">in the economy as an aftereffect of this deterioration. Notwithstandin" rel="nofollow">ing, it is not recommendable for the currency to move to the extremes of the bipolar contin" rel="nofollow">inuum of the currency changes. In the event the that the money devalues excessively, then it will hurt the economy by makin" rel="nofollow">ing the imports of raw materials excessively costly. Basin" rel="nofollow">ing on the theory of comparative advantage, each nation needs to import some of its raw materials and services occasionally. In like manner, an excessive amount of depreciation would generate a balance of payments (BOP) deficit because it would in" rel="nofollow">inhibit foreign in" rel="nofollow">investment. Then again" rel="nofollow">in, if a currency appreciates excessively, it could hurt the terms of exchange of the nation. For in" rel="nofollow">instance, if the exports of the nation are very expensive, this would prompt little in" rel="nofollow">interest in" rel="nofollow">in them. Regardless of the fact that the nation would have the capacity to import in" rel="nofollow">inputs in" rel="nofollow">inexpensively, this may be an eventual burden to the economy sin" rel="nofollow">ince it would in" rel="nofollow">instigate overproduction accordin" rel="nofollow">ing to Mc Govern 2016. The ramifications of the exchange rates on the economy have thusly divided the exchange rate regimes of the world. There are exchange rates which move unin" rel="nofollow">inhibitedly with the adjustments the market forces, and those which are controlled by monetary authorities, as discussed in" rel="nofollow">in detail in" rel="nofollow">in the next section. It is likewise essential to note that currency changes affect the profitability of the multin" rel="nofollow">inational companies and other in" rel="nofollow">international traders. For in" rel="nofollow">instance, KFC has made yearly profits in" rel="nofollow">in the France which it has not yet exchanged to dollars. On the chance that at the date of the change from the Euro to the dollar, the Euro appreciates, then KFC will make a currency gain" rel="nofollow">in because it will have more dollars for its Euro. The converse is likewise true. In another case, HSBC may have issued credit in" rel="nofollow">in dollars to a large multin" rel="nofollow">inational. In the period amid which the in" rel="nofollow">interest and the prin" rel="nofollow">incipal is bein" rel="nofollow">ing paid, the exchange rates forms will change. In the event that the dollar in" rel="nofollow">increased in" rel="nofollow">in value, HSBC will make currency losses in" rel="nofollow">in because, it will have less pounds than it had in" rel="nofollow">initially anticipated that would gain" rel="nofollow">in. Then again" rel="nofollow">in, say Medtronic procured a German organization for €100 million on 13 May 2016 when the USD/EUR rate was 0.8. On the chance that Medtronic is goin" rel="nofollow">ing to settle the in" rel="nofollow">installment on 1 June 2016, and on that day the USD/EUR is 0.6, then Medtronic will lose an additional $17.8 million in" rel="nofollow">in the exceeds payments it will make. Foreign exchange can be traded different ways, which have been categorized accordin" rel="nofollow">ing to their times transactin" rel="nofollow">ing (Johnson 2013). The spot exchange rate is the rate at which the currency is transacted on a particular day, such as is the case in" rel="nofollow">in forex bureau. The currency futures alternatively refer to the rate at which different entities agree to exchange currency at a future date. For in" rel="nofollow">instance, if an organization is gettin" rel="nofollow">ing a dispatch of in" rel="nofollow">inventory in" rel="nofollow">in 30 days and needs to in" rel="nofollow">insure again" rel="nofollow">inst currency in" rel="nofollow">instability, it can utilize futures to accomplish this. It would go to a forex seller and arrange a rate at which to purchase the required currency on that date later on. Lastly, a currency forward is the rate which two or more entities consent to transact with on a given date later on. For in" rel="nofollow">instance, if a foreign organization needed to purchase stock from a UK organization on a future date, the two could concede to a given rate at which to exchange their items without min" rel="nofollow">indin" rel="nofollow">ing what the exchange rates really are. To main" rel="nofollow">intain" rel="nofollow">in a strategic distance from such episodes as currency volatility from in" rel="nofollow">inflictin" rel="nofollow">ing on them, a few people and organizations take an in" rel="nofollow">interest in" rel="nofollow">in currency hedgin" rel="nofollow">ing. They buffer again" rel="nofollow">inst the danger of losin" rel="nofollow">ing money to currency unpredictability. To that end, the most used in" rel="nofollow">instrument is the forward contract. In the forward contract, the parties who will be engagin" rel="nofollow">ing in" rel="nofollow">in the exchange concur that one is goin" rel="nofollow">ing to purchase whatever it is they are purchasin" rel="nofollow">ing, from the vender at a given exchange rate regardless of the actual prevailin" rel="nofollow">ing rate. For in" rel="nofollow">instance, if Medtronic was acquirin" rel="nofollow">ing an organization and concluded that it was payin" rel="nofollow">ing the cash on a given date and the exchange rates are different on that date, then Medtronic would still pay the rate on which it concurred. Types of exchange rate regimes The foreign exchange world is characterized by various types of foreign exchange regimes, which are elaborated as follows: A floatin" rel="nofollow">ing exchange rate regime is the one where a country lets the market forces in" rel="nofollow">influence its currency, with hardly any in" rel="nofollow">interference from the authorities (Ghosh 2015). The United Kin" rel="nofollow">ingdom falls under this category, accordin" rel="nofollow">ing to an article by the IMF (De Facto Classification of Exchange Rate Regimes and Monetary Policy Framework 2006). The other exchange rate regime is that of exchange rate arrangements with no separate legal tender. With this kin" rel="nofollow">ind of regime, the currency of a foreign country is the only legal tender. Alternatively, this kin" rel="nofollow">ind of regime requires that the nations which are usin" rel="nofollow">ing it are under regional in" rel="nofollow">integration such as is the case in" rel="nofollow">in the EU. Consequently, all of the Euro countries fall under this category. Conceivably, the IMF poin" rel="nofollow">ints out that this signifies the total surrender of the power to control the currency by the monetary authority (De Facto Classification of Exchange Rate Regimes and Monetary Policy Framework 2006). Moreover, this surrender of authority then puts the country in" rel="nofollow">in the precarious position where its economy is partially at the mercy of the external economic policy makers. Arguably, this can be a positive move because it creates economies of scale in" rel="nofollow">in managin" rel="nofollow">ing the currency. The pegged currency regime is the one where the currency of a country is pegged either formally or in" rel="nofollow">informally to the currencies of other countries. Accordin" rel="nofollow">ing to the IMF, the currencies again" rel="nofollow">inst which the currency is pegged are usually those of the tradin" rel="nofollow">ing partners (De Facto Classification of Exchange Rate Regimes and Monetary Policy Framework 2006). However, the peggin" rel="nofollow">ing in" rel="nofollow">indicated the distribution of trade within" rel="nofollow">in the tradin" rel="nofollow">ing region or circle. In other words, those with high volumes of trade naturally have higher value currencies. Noteworthy, the peg is designed in" rel="nofollow">in such a way that the currency of the peggin" rel="nofollow">ing country is not allowed to exceed or go under a particular threshold in" rel="nofollow">in relation to the other currencies. Notably, there are other underlyin" rel="nofollow">ing specifications within" rel="nofollow">in the aforementioned types of exchange rates, but these are the major exchange rates. Monetary policy Considerin" rel="nofollow">ing that one of the effects of changes in" rel="nofollow">in exchange rates is a change in" rel="nofollow">in the monetary policy of countries, it is valid to in" rel="nofollow">include this section in" rel="nofollow">in the literature review. Bruno & Shin" rel="nofollow">in (2015) postulate that the exchange rates usually dictate economic policy in" rel="nofollow">in general and monetary policy in" rel="nofollow">in particular. However, the reverse is also true. For example, a country which is seekin" rel="nofollow">ing to reduce its in" rel="nofollow">inflation through a contractionary monetary policy can hike its in" rel="nofollow">interest rates, and this hike in" rel="nofollow">in the in" rel="nofollow">interest rates will in" rel="nofollow">increase foreign in" rel="nofollow">investment in" rel="nofollow">in the economy. This in" rel="nofollow">in turn will make the currency appreciate. Alternatively, the changes in" rel="nofollow">in the currency can affect the monetary policy of the country as well. For example, a depreciatin" rel="nofollow">ing currency may in" rel="nofollow">increase the demand for the exports of the country. This may in" rel="nofollow">increase the amount of money in" rel="nofollow">in the economy and possibly cause unsustain" rel="nofollow">inable in" rel="nofollow">inflation. Consequently, the central bank is likely to impose contractionary monetary policies in" rel="nofollow">in response. Discussed below are the most common monetary mechanisms for in" rel="nofollow">influencin" rel="nofollow">ing or respondin" rel="nofollow">ing to in" rel="nofollow">interest rate changes. exchange rate anchor is the framework where the monetary authority is consistently kept ready to buy or sell foreign currencies with the aim of keepin" rel="nofollow">ing their own currencies at a predetermin" rel="nofollow">ined level. This mechanism is applied to all of the exchange rate regimes with the exception of the free float currency regime. Inflation targetin" rel="nofollow">ing framework is the one where the monetary authority bases its currency activities on the differences between the target and the actual in" rel="nofollow">inflation. Considerin" rel="nofollow">ing the power which in" rel="nofollow">inflation has over the economy, this mechanism is rather effective (De Facto Classification of Exchange Rate Regimes and Monetary Policy Framework 2006). Noteworthy, the monetary control mechanisms are not limited to these two frameworks, but the others are customized across countries. A fuller presentation of these mechanisms is in" rel="nofollow">indicated in" rel="nofollow">in table 1 below. Table 1: Currency regimes accordin" rel="nofollow">ing to country and monetary policy Exchange Rate Regime (Number of countries) Monetary Policy Framework exchange rate anchor Monetary aggregate target Inflation targetin" rel="nofollow">ing framework IMF-supported or other monetary program Other Exchange arrangements with no separate legal tender (41) Another currency as legal tender (9) ECCU (6)3 CFA franc zone (14) Euro area (12) Austria Belgium Fin" rel="nofollow">inland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain" rel="nofollow">in WAEMU CAEMC Ecuador El Salvador Kiribati Marshall Islands Micronesia, Fed. States of Palau Panama San Marin" rel="nofollow">ino Timor-Leste, Dem. Rep. of Antigua and Barbuda Domin" rel="nofollow">inica* Grenada* St. Kitts and Nevis St. Lucia St. Vin" rel="nofollow">incent and the Grenadin" rel="nofollow">ines Benin" rel="nofollow">in* Burkin" rel="nofollow">ina Faso* Côte d'Ivoire Guin" rel="nofollow">inea-Bissau Mali* Niger* Senegal Togo Cameroon* Central African Rep. Chad* Congo, Rep. of* Equatorial Guin" rel="nofollow">inea Gabon Currency board arrangements (7) Bosnia and Herzegovin" rel="nofollow">ina Brunei Darussalam Bulgaria* Hong Kong SAR Djibouti Estonia Lithuania Other conventional fixed peg arrangements (52) Again" rel="nofollow">inst a sin" rel="nofollow">ingle currency (47) Chin" rel="nofollow">ina Guyana*7, 8 Sierra Leone*7 Surin" rel="nofollow">iname, 8, 9 Pakistan Aruba Bahamas, The Bahrain" rel="nofollow">in, Kin" rel="nofollow">ingdom of Barbados Belarus Belize Bhutan Bolivia, 10 Cape Verde Chin" rel="nofollow">ina Comoros 11 Egypt Eritrea Ethiopia Guyana*7, 8 Honduras*†7 Iraq*7 Jordan Kuwait Latvia Lebanon Lesotho Macedonia, FYR*7 Maldives Malta Mauritania Namibia Nepal* Netherlands Antilles Oman Pakistan Qatar Rwanda* Saudi Arabia Seychelles Sierra Leone*7 Solomon Islands Surin" rel="nofollow">iname, 9 Swaziland Syrian Arab Sep. Trin" rel="nofollow">inidad and Tobago Turkmenistan Ukrain" rel="nofollow">ine United Arab Emirates Venezuela, Rep. Bolivarian de Vietnam Zimbabwe Again" rel="nofollow">inst a composite (5) Fiji Libyan Arab Jamahiriya Morocco Samoa Vanuatu Pegged exchange rates within" rel="nofollow">in horizontal bands (6)12 Within" rel="nofollow">in a cooperative arrangement (4) Cyprus Denmark Slovak Rep. Slovenia Other band arrangements (2) Hungary Tonga Hungary Slovak Rep. Crawlin" rel="nofollow">ing pegs (5) Azerbaijan Botswana Costa Rica Iran, I.R. of, 13 Nicaragua Iran, I.R. of, 13 Managed floatin" rel="nofollow">ing with no pre-determin" rel="nofollow">ined path for the exchange rate (51) Argentin" rel="nofollow">ina Bangladesh* Cambodia Gambia, The Ghana*7 Haiti Jamaica Lao P.D.R.9 Madagascar*7 Malawi* Mauritius Moldova* Mongolia Sri Lankan Sudan Tajikistan Tunisia Uruguay* Yemen, Rep. of Zambia* Colombia* Czech Rep. Guatemala Peru* Romania Serbia, Rep. of Thailand Afghanistan, I.R. of* Armenia*7 Georgia* Kenya* Kyrgyz Rep.* Mozambique*7 Algeria Angola Burundi* Croatia* Domin" rel="nofollow">inican Rep.* Guin" rel="nofollow">inea India Kazakhstan Liberia Malaysia Myanmar Nigeria Papua New Guin" rel="nofollow">inea Paraguay* Russian Federation São Tomé and Príncipe* Sin" rel="nofollow">ingapore Uzbekistan Independently floatin" rel="nofollow">ing (25) Albania* Congo, Dem. Rep. of Indonesia Uganda Australia Brazil Canada Chile Iceland Israel Korea Mexico New Zealand Norway Philippin" rel="nofollow">ines Poland South Africa Sweden Turkey* United Kin" rel="nofollow">ingdom Tanzania*7 Japan Somalia, 15 Switzerland United States Source: IMF.org (For details https://www.imf.org/external/np/mfd/er/2006/eng/0706.htm) Interest rate The in" rel="nofollow">interest rates in" rel="nofollow">influence the trades rates through different components. If for in" rel="nofollow">instance the central bank expands the in" rel="nofollow">interest rates, the currency of the nation will appreciate. When the in" rel="nofollow">interest rate heightens, it gets more profitable to in" rel="nofollow">invest in" rel="nofollow">in the economy in" rel="nofollow">in light of the fact that the in" rel="nofollow">investors will get more returns for their money. Resultantly, when the in" rel="nofollow">interest rates are raised, then more in" rel="nofollow">individuals will purchase the currency of a given nation with the aim of savin" rel="nofollow">ing their money there. For in" rel="nofollow">instance, if the in" rel="nofollow">interest rates in" rel="nofollow">in the UK in" rel="nofollow">increased by 2%, the in" rel="nofollow">investors would hope to procure 2% more than they were gettin" rel="nofollow">ing on their pound in" rel="nofollow">investments. This would drive them to purchase for more pounds, and this trend would drive the cost of the pound higher, as represented in" rel="nofollow">in figure 1. Then again" rel="nofollow">in, if the in" rel="nofollow">interest rates decrease, then in" rel="nofollow">individuals have less on a motivation to save. This may either stagnate the in" rel="nofollow">interest for the currency of a nation or depreciate it, on the chance that the various components are held constant (Gail 2015). Figure 1: Changes in" rel="nofollow">in the demand of the pound after an in" rel="nofollow">interest rate raise This affirms Acerola et al.’s (2014) proposition that the ascent in" rel="nofollow">in in" rel="nofollow">interest rates drives the value in" rel="nofollow">into a nation's currency. However, this is only true for countries with floatin" rel="nofollow">ing currencies. On the other hand, the in" rel="nofollow">interest rates can in" rel="nofollow">influence the exchange rates of a nation by impactin" rel="nofollow">ing the quantity of in" rel="nofollow">investment. In the event that the in" rel="nofollow">interest rates are high, the general population in" rel="nofollow">in the economy have an impetus to save a greater amount of their cash. This gives the bankin" rel="nofollow">ing in" rel="nofollow">institutions more money to lend. When the busin" rel="nofollow">inesses and in" rel="nofollow">individuals have access to the necessary funds, they can expand their busin" rel="nofollow">iness and eventually, the domestic busin" rel="nofollow">iness sector will become saturated. At such capacity, the local in" rel="nofollow">investors will expand in" rel="nofollow">into universal markets and they will exchange their local currency for foreign currency. Be that as it may, this doesn't devalue their local money as a result of the possible repatriation of their in" rel="nofollow">income, which is assimilated in" rel="nofollow">into their local economy. This consequently makes their currency. Similarly, an in" rel="nofollow">increase in" rel="nofollow">in the in" rel="nofollow">interest rates over the long and medium term builds up the culture of savin" rel="nofollow">ing. This is on the grounds that the opportunity cost of consumin" rel="nofollow">ing the money becomes much higher because of the in" rel="nofollow">increased in" rel="nofollow">interest rate. Resultantly, in" rel="nofollow">individuals start to save more of their cash, and this causes a declin" rel="nofollow">ine in" rel="nofollow">in aggregate demand. This has two types of impacts. The primary impact is an immediate one in" rel="nofollow">in that the lack of the money in" rel="nofollow">in the economy will prompt its demand surpassin" rel="nofollow">ing its supply. This will then cause the currency to appreciate. Then again" rel="nofollow">in, the low aggregate demand may prompt a decrease in" rel="nofollow">in the amount of imports. In the event that the nation bein" rel="nofollow">ing referred to keeps up a vast terms of trade deficits, the decrease in" rel="nofollow">in the value of imports can prompt currency depreciation. This deterioration would be a consequence of the decrease in" rel="nofollow">in the demand of the currency of the economy as a result of the decrease in" rel="nofollow">in imports. Be that as it may, both the UK and the USA have reliably had in" rel="nofollow">incremental import values over the time of this examin" rel="nofollow">ination (10 years) as demonstrated in" rel="nofollow">in figure 2. Sources: Census.gov and ons.gov.uk This demonstrates the adjustments in" rel="nofollow">in the in" rel="nofollow">interest rates have not been sufficiently considerable to in" rel="nofollow">influence the rates of importation in" rel="nofollow">in the nation (notwithstandin" rel="nofollow">ing when they declin" rel="nofollow">ined). It is likewise imperative to note, that this deterioration would only happen if the value of the imports which are bein" rel="nofollow">ing hin" rel="nofollow">indered by a decrease in" rel="nofollow">in the aggregate demand surpasses the value of the foreign savin" rel="nofollow">ings which drive up the in" rel="nofollow">interest of the currency bein" rel="nofollow">ing referred to. At the end of the day, the impact of the in" rel="nofollow">interest rates on the exchange rates is a symbiotic relationship which is affected by different elements. Inflation In the event that the in" rel="nofollow">inflation in" rel="nofollow">in a given nation is generally lower than that of different nations, then the products of that nation will be less expensive. This attracts customers to the products of such a nation. Thusly, the demand for the currency of the nation bein" rel="nofollow">ing referred to will rise and that will brin" rel="nofollow">ing about currency appreciation. On the other hand, if the in" rel="nofollow">inflation in" rel="nofollow">in a given nation is higher than that in" rel="nofollow">in different nations, then the money of the currency bein" rel="nofollow">ing referred to might depreciate. This depreciation would be an aftereffect of the decrease in" rel="nofollow">in the demand for the currency of the nation bein" rel="nofollow">ing referred to in" rel="nofollow">in view of the decrease in" rel="nofollow">in the demand for its exports. In any case, there are different elements which must be considered with this hypothesis. For in" rel="nofollow">instance, the nation bein" rel="nofollow">ing referred to might have comparative advantage. Alternatively, the nation bein" rel="nofollow">ing referred to might have trade agreements with its key trade partners, in" rel="nofollow">in the opin" rel="nofollow">inion of Case et al. (2012). The in" rel="nofollow">inflation rate can likewise impact the exchange rates by affectin" rel="nofollow">ing the in" rel="nofollow">interest rates of an economy. Ordin" rel="nofollow">inarily, when the in" rel="nofollow">inflation rate rises past the target of the central bank, then the same bank tries to brin" rel="nofollow">ing that in" rel="nofollow">inflation down by in" rel="nofollow">increasin" rel="nofollow">ing the in" rel="nofollow">interest rates. The in" rel="nofollow">increment in" rel="nofollow">in these in" rel="nofollow">interest rates then decreases the measure of spendin" rel="nofollow">ing in" rel="nofollow">in the economy as a result of the high opportunity cost of spendin" rel="nofollow">ing rather than savin" rel="nofollow">ing (Mania 2014). This amount of savin" rel="nofollow">ing would give the fin" rel="nofollow">inancial in" rel="nofollow">institutions more to loan to forthcomin" rel="nofollow">ing in" rel="nofollow">investors. Be that as it may, considerin" rel="nofollow">ing that the in" rel="nofollow">interest rates will be higher, the rate of borrowin" rel="nofollow">ing would be lower as per Mania (2014). The summative fin" rel="nofollow">inish of this situation is that the demand for the currency will rise in" rel="nofollow">in view of its shortage. This demand along these lin" rel="nofollow">ines makes the currency appreciate. The above two propositions depend on the presence of controllable in" rel="nofollow">inflation and stable economic development. In any case, if the in" rel="nofollow">inflation is extreme to the degree that was faced in" rel="nofollow">in Zimbabwe, then it will undoubtedly pulverize the currency of the nation. High in" rel="nofollow">inflation can radically depreciate the currency of a nation (Wray 2015). Subsequently, the value of exports of the nation likewise decrease radically, in" rel="nofollow">in light of the fact that purchasin" rel="nofollow">ing the currency of the export destin" rel="nofollow">inations is very costly. In such a situation, even the local markets would crumple on the grounds that the expense of thin" rel="nofollow">ings would be very costly for the subjects, makin" rel="nofollow">ing it impossible to manage. This would restrain" rel="nofollow">in the productivity of the imports and subsequently, decrease the demand for the money of the nation even more. The effect of in" rel="nofollow">inflation on the in" rel="nofollow">interest rates is also dependent upon the level of central bank or government in" rel="nofollow">indolent in" rel="nofollow">in the foreign exchange of a nation (Burnside et al. 2016). In the event that the exchange rate is left to float unin" rel="nofollow">inhibitedly, then the proposition that in" rel="nofollow">inflation in" rel="nofollow">influences it is a certain" rel="nofollow">inty. This is on account that the currency costs are left to change with the forces. Both the US and the UK have unreservedly monetary standards without the immediate mediation of their national banks so the past contention applies to them both. Be that as it may, in" rel="nofollow">in the economies where the exchange rate is controlled by the authorities, it is possible for them to overlook the in" rel="nofollow">inflation and fix the in" rel="nofollow">interest rates however they see fit. For the whole discussion, the effect of the in" rel="nofollow">inflation on the exchange rates has in" rel="nofollow">incredibly been founded on the in" rel="nofollow">inner poin" rel="nofollow">int of view. In any case, there is a great deal of academic proof in" rel="nofollow">indicatin" rel="nofollow">ing the way that the economic environment in" rel="nofollow">in one nation in" rel="nofollow">influences the economic environment in" rel="nofollow">in other nations (Steers & Narvon 2014). In addition, this situation has significantly been exacerbated by the ascent in" rel="nofollow">in the degree and extent of globalization. Thus, the in" rel="nofollow">inflation rates in" rel="nofollow">in the nations which are the tradin" rel="nofollow">ing partners of the USA and the UK likewise in" rel="nofollow">influences the exchange rates of these nations. For in" rel="nofollow">instance, Chin" rel="nofollow">ina is the main" rel="nofollow">in export partner of the US (Trade in" rel="nofollow">in goods with Chin" rel="nofollow">ina 2016). In any case, the fast economic development in" rel="nofollow">in Chin" rel="nofollow">ina has demonstrated unsustain" rel="nofollow">inability, somethin" rel="nofollow">ing which is debilitatin" rel="nofollow">ing the economic stability of the US. As the excess production destabilizes Chin" rel="nofollow">ina’s economic growth, the US organizations which had made it a pattern to offshore their production there are in" rel="nofollow">in hazard. The in" rel="nofollow">incremental demand for Chin" rel="nofollow">inese labor may in" rel="nofollow">inflate it, and this would in" rel="nofollow">increase production costs. On the chance that this happens, then the US organizations would have lower benefits to repatriate to the US. Considerin" rel="nofollow">ing that these organizations are makin" rel="nofollow">ing generous segments of their in" rel="nofollow">income in" rel="nofollow">in Chin" rel="nofollow">ina, a decrease in" rel="nofollow">in the measure of repatriated funds would reduce the demand for the dollar. From an alternate poin" rel="nofollow">int of view on the issue, these offshorin" rel="nofollow">ing organizations for the most part export their items from Chin" rel="nofollow">ina back to the US, with the most popular one bein" rel="nofollow">ing Apple. In the event that the expenses of reducin" rel="nofollow">ing in" rel="nofollow">in Chin" rel="nofollow">ina rise, their items will turn out to be costlier and as the law of demand predicts, this will reduce the in" rel="nofollow">interest for their imports. On the off chance that this happens, then the dimin" rel="nofollow">inishment in" rel="nofollow">in the volume of the imports will decrease the demand for the dollar and this may prompt the deterioration of the dollar. Balance of payments The balance of payments in" rel="nofollow">influences the exchange rates in" rel="nofollow">in an assortment of ways. In the first place, the parity of exchange decides how much the currency of an economy is requested for. The predomin" rel="nofollow">inance of the US in" rel="nofollow">in universal exchange can be set as one reason why the dollar has stayed a standout amongst the currencies on the planet. In any case, in" rel="nofollow">in the event that you take a look at the recorded export figures of the US in" rel="nofollow">in figure 3 underneath, it demonstrates that the relationship between the dollar in" rel="nofollow">index and exports is erratic. The dollar is a universally used currency, and this is prone to contort the genuin" rel="nofollow">ine relationship between US balance of payments and the adjustments in" rel="nofollow">in the value the currency. Other than that, the way that it is generally reserved in" rel="nofollow">in substantial amounts by nations like Chin" rel="nofollow">ina also justifies the irregularity. The fin" rel="nofollow">inancial section of the BOP also in" rel="nofollow">influences the exchange rate of a nation. The pattern of foreign in" rel="nofollow">investment in" rel="nofollow">in securities is on the ascent both in" rel="nofollow">in the UK and in" rel="nofollow">in the US. This is because of the extension of developin" rel="nofollow">ing busin" rel="nofollow">iness sector multin" rel="nofollow">inationals like Lenovo and LG. Be that as it may, to purchase these securities, the in" rel="nofollow">investors need to utilize the currency section of the nation in" rel="nofollow">in which they are purchasin" rel="nofollow">ing the securities, and this builds the demand for the currency of the host nation. The fin" rel="nofollow">inancial account likewise checks the foreign reserves, as specified earlier. In the event that a nation purchases such an extensive amount another nation's currency for foreign reserves, then the currency of the other nation is prone to rise as a result of the expansion in" rel="nofollow">in its demand. Truth be told, a few nations have been blamed for utilizin" rel="nofollow">ing this fundamental of the parity of in" rel="nofollow">installment to impact the cash developments of different nations. For in" rel="nofollow">instance, it was alleged that Chin" rel="nofollow">ina was accumulatin" rel="nofollow">ing US dollars in" rel="nofollow">in its foreign reserves just to in" rel="nofollow">increase the value of the dollar (Arizonan 2015). As it were, if a nation means to drive the value of one currency up, it can raise its outside stores for that money. At the poin" rel="nofollow">int when that happens, the shortage of the currency and the expansion in" rel="nofollow">in its demand naturally drive up its cost. Be that as it may, a nation may do this with a specific end goal to make in" rel="nofollow">increase the cost of the exports of its rivals in" rel="nofollow">in the worldwide busin" rel="nofollow">iness sector. In doin" rel="nofollow">ing as such, the products of the nation with the lower value money would be favored over those of the other. Speculation Frenkel & Johnson, (2013) concede that the changes in" rel="nofollow">in the exchange rates are not always a representation of economic fundamentals. Sometimes, the changes in" rel="nofollow">in the currencies reflect the sentiments or thoughts of the currency traders. If they believe that a future occurrence shall change the value of the currency, they structure their demand and supply accordin" rel="nofollow">ingly. For example, after the Brexit vote, the British pound depreciated again" rel="nofollow">inst the dollar the very next day (Soffen 2016). This is because in" rel="nofollow">institutions had stopped buyin" rel="nofollow">ing pound sterlin" rel="nofollow">ing on a large scale because of the trade restrictions which the UK had in" rel="nofollow">invited upon itself when it voted for the exit out of the EU. Alternatively, speculation can lead to the hoardin" rel="nofollow">ing of a given currency because of the belief that its value will rise in" rel="nofollow">in future. When this happens, then the demand for the currency in" rel="nofollow">in question rises and consequently, the value of the currency. Government fin" rel="nofollow">inancial stability Government securities are the threshold of risk free tradin" rel="nofollow">ing. In other words, governments are not expected to default on their debt (Damodaran 2016). However, in" rel="nofollow">in the rare case that the government appears like it might default on its debt, then the holders of this debt are likely to get in" rel="nofollow">into a rush to sell it. If that happens, then the supply of the currency in" rel="nofollow">in question is likely to depreciate it. Positionin" rel="nofollow">ing of the other currencies The changes in" rel="nofollow">in the strength of other currencies countries is also an in" rel="nofollow">influence. If the currencies of other countries are becomin" rel="nofollow">ing relatively unstable, then the in" rel="nofollow">investors and other entities are likely to purchase other currencies over the one which are more stable. At the begin" rel="nofollow">innin" rel="nofollow">ing of the Eurozone crisis for example, the Euro was very unstable and the US was also goin" rel="nofollow">ing through another fin" rel="nofollow">inancial crisis around the end of 2011 and the begin" rel="nofollow">innin" rel="nofollow">ing of 2012. Because of this, there are some other global currencies which gain" rel="nofollow">ined momentum. These currencies in" rel="nofollow">include the Swiss Franc and the Japanese yen (Frenkel & Johnson 2013). Direct in" rel="nofollow">intervention by the government Some governments artificially engin" rel="nofollow">ineer their exchange rates in" rel="nofollow">in order to achieve a predetermin" rel="nofollow">ined result. Besides usin" rel="nofollow">ing the conventional mechanisms of currency control, such as currency regimes, some countries use unorthodox measures. For example, Chin" rel="nofollow">ina was alleged to have in" rel="nofollow">interfered with the currency values of both the yuan and the dollar. The country achieved this by hoardin" rel="nofollow">ing dollars in" rel="nofollow">in its reserves with the aim of devaluin" rel="nofollow">ing the yuan and makin" rel="nofollow">ing the dollar appreciate. Economic cycles The economic cycles of recession and economic growth also have the capacity to in" rel="nofollow">influence changes in" rel="nofollow">in the foreign currency (Frenkel & Johnson 2013). When there is economic growth in" rel="nofollow">in the country, it attracts more in" rel="nofollow">investment because of the growin" rel="nofollow">ing disposable in" rel="nofollow">income. This new in" rel="nofollow">investment in" rel="nofollow">increases the demand for the currency of the country and therefore, causes its currency to appreciate. On the other hand, if the economy of a country is undergoin" rel="nofollow">ing a recession, it will attract less in" rel="nofollow">investment. Consequently, the demand for its currency will declin" rel="nofollow">ine, and this will depreciate the aforementioned currency. Effects of the changes in" rel="nofollow">in the exchange rates of the Euro and the pound The changes in" rel="nofollow">in the currency of a country can restructure the gross domestic product of a country, accordin" rel="nofollow">ing to Magud et al. (2014). Considerin" rel="nofollow">ing that a portion of the GDP deals with the terms of trade (X-M), then the changes in" rel="nofollow">in the exchange rate is bound to change the GDP. The volume of exports of a country is highly contin" rel="nofollow">ingent on the strength of that country’s currency relative to other currencies. If the currency of the given country is too strong, then it is highly likely that the exports of the same country will be lower than those of the other countries where the currency is relatively cheap. The changes in" rel="nofollow">in the in" rel="nofollow">interest rate also affect the securities of a country. When the currency appreciates, the securities become more expensive. Moreover, accordin" rel="nofollow">ing to fin" rel="nofollow">inancial valuation, these securities may be overvalued because of the currency differences. Resultantly, the foreign in" rel="nofollow">investors might refuse to pay for the stocks because they would understand that they are in" rel="nofollow">inflated by currency appreciation. Moreover, it would highly be likely that these stocks would possibly declin" rel="nofollow">ine in" rel="nofollow">in the near future because of the in" rel="nofollow">increase in" rel="nofollow">in the price of exports (most public companies are multin" rel="nofollow">inational). On the other hand, after depreciation of a currency, the stock market is likely to strengthen in" rel="nofollow">in the short run because the cost of the stock would be lower and an in" rel="nofollow">increase in" rel="nofollow">in foreign in" rel="nofollow">investment would be speculated. However, Frenkel & Johnson (2013) highlight the importance of studyin" rel="nofollow">ing the cause of the currency movements, as it would be one of the leadin" rel="nofollow">ing poin" rel="nofollow">inters about how the stock market will react. For example, after the UK voted to exit the European Union, the pound dropped along with the drop in" rel="nofollow">in the FTSE, which is one of the leadin" rel="nofollow">ing stock in" rel="nofollow">index (Wearden & Fletcher 2016). The changes in" rel="nofollow">in the exchange rate can also affect the levels of foreign direct in" rel="nofollow">investment flowin" rel="nofollow">ing in" rel="nofollow">in and out of the economy. When the currency appreciates, foreign companies which would like to in" rel="nofollow">invest in" rel="nofollow">in the economy must spend more of their currency to in" rel="nofollow">invest in" rel="nofollow">in the country in" rel="nofollow">in question. For example, if Chevron was conductin" rel="nofollow">ing a feasibility study about in" rel="nofollow">investin" rel="nofollow">ing in" rel="nofollow">in the EU at a rate of 0.5 USD/EUR. Then a few weeks later, the Euro appreciates to 0.4, then Chevron would have to in" rel="nofollow">increase the dollar value of its in" rel="nofollow">investments despite the fact that the returns in" rel="nofollow">in Euros would remain" rel="nofollow">in the same. Foreign exchange changes can also affect the in" rel="nofollow">inflation rates of a country. If the exchange rate in" rel="nofollow">increases for a particular currency, then the cost of the imports declin" rel="nofollow">ines. Moreover, this declin" rel="nofollow">ine in" rel="nofollow">in the cost of imports can drastically in" rel="nofollow">influence the balance of trade, because people are likely to in" rel="nofollow">increase their consumption of the said imports. Conclusion In this period of in" rel="nofollow">intense globalization and a lin" rel="nofollow">inked global economy, the market of foreign exchange is the busiest market in" rel="nofollow">in the world. Moreover, the foreign exchange movements at the national level are in" rel="nofollow">influenced by currency regimes like floatin" rel="nofollow">ing currency regime and the pegged currency regime. From these domestic regimes, the currencies in" rel="nofollow">interact with other currencies in" rel="nofollow">in the global market to in" rel="nofollow">influence regional and global economics, as discussed throughout the paper. These exchange rates of a given nation play a vital role in" rel="nofollow">in the macro economic environment of a country. These exchange rates affect a variety of economic components from in" rel="nofollow">inflation to the gross domestic product of a country. However, it is impossible to understand exchange rates effects without first analyzin" rel="nofollow">ing the factors which cause these changes in" rel="nofollow">in the exchange rates. As illustrated in" rel="nofollow">in the above discussion, scholars put a lot of emphasis on three main" rel="nofollow">in in" rel="nofollow">influences of the exchange rate changes, in" rel="nofollow">includin" rel="nofollow">ing in" rel="nofollow">inflation, in" rel="nofollow">interest rates, and the balance of payments. Noteworthy though, the research about the topic is greatly generalized across nations and there is no specific literature which confin" rel="nofollow">ines its study on the Euro or the pound. However, the fin" rel="nofollow">indin" rel="nofollow">ings section of this dissertation in" rel="nofollow">intends to answer this this question by usin" rel="nofollow">ing primary data. References Books Akerlof, GA, Blanchard, O, Romer, D, & Stiglitz, JE 2014, What Have We Learned?: Macroeconomic Policy After the Crisis, Boston, MIT Press. Burnside, C, Eichenbaum, M, & Rebelo, S 2016 Currency crises models in" rel="nofollow">in bankin" rel="nofollow">ing crises, Basin" rel="nofollow">ingstoke, Palgrave Macmillan UK. Case, KE, Fair, RC, & Oster, SM 2012, Prin" rel="nofollow">inciples of economics, Upper Saddle River, Prentice Hall. Damodaran, A 2016, Damodaran on valuation: security analysis for in" rel="nofollow">investment and corporate fin" rel="nofollow">inance, Hoboken, NJ, John Wiley & Sons. Frenkel, JA, & Johnson, HG 2013, The Economics of Exchange Rates (Collected Works of Harry Johnson): Selected Studies, London, Routledge. Galí, J 2015, Monetary policy, in" rel="nofollow">inflation, and the busin" rel="nofollow">iness cycle: an in" rel="nofollow">introduction to the new Keynesian framework and its applications, Prin" rel="nofollow">inceton, Prin" rel="nofollow">inceton University Press. Johnson, HG 2013, International Trade and Economic Growth (Collected Works of Harry Johnson): Studies in" rel="nofollow">in Pure Theory, London, Routledge. Mankiw, NG 2014, Prin" rel="nofollow">inciples of macroeconomics, Mason, OH, Cengage Learnin" rel="nofollow">ing. McGovern, E 2016, International trade regulation, New York, Globefield Press. Steers, RM, & Nardon, L 2014, Managin" rel="nofollow">ing in" rel="nofollow">in the global economy, London, Routledge. Wray, LR 2015, Modern money theory: A primer on macroeconomics for sovereign monetary systems, Berlin" rel="nofollow">in, Sprin" rel="nofollow">inger. Journals Aizenman, J 2015, Internationalization of the RMB, Capital Market Openness and Fin" rel="nofollow">inancial Reforms in" rel="nofollow">in Chin" rel="nofollow">ina, Pacific Economic Review, Vol. 20, No. 3, pp. 444-460. Bruno, V, & Shin" rel="nofollow">in, HS 2015, Capital flows and the risk-takin" rel="nofollow">ing channel of monetary policy, Journal of Monetary Economics, Vol. 71, No. 1, pp. 119-132. Ghezzi, A. (2013). Revisitin" rel="nofollow">ing busin" rel="nofollow">iness strategy under discontin" rel="nofollow">inuity. Management Decision, Vol. 51. No.7, pp.1326-1358. Ghosh, AR, Ostry, JD, & Qureshi, MS 2015, exchange rate management and crisis susceptibility: A reassessment, IMF Economic Review, Vol. 63, No.1, pp. 238-276. Magud, NE, Rein" rel="nofollow">inhart, CM, & Vesperoni, ER 2014, Capital in" rel="nofollow">inflows, exchange rate flexibility and credit booms, Review of Development Economics, Vol. 18, No. 3, pp.415-430. Onlin" rel="nofollow">ine sources De Facto Classification of Exchange Rate Regimes and Monetary Policy Framework 2006, International Monetary Fund, Retrieved on 9 August 2016 from https://www.imf.org/external/np/mfd/er/2006/eng/0706.htm Feenstra, RC 2015, Advanced in" rel="nofollow">international trade: theory and evidence, Prin" rel="nofollow">inceton, Prin" rel="nofollow">inceton university press. Foreign trade data historical series 2016, United States Census Bureau, Retrieved on 9 August, 2016 from https://www.census.gov/foreign-trade/statistics/historical/in" rel="nofollow">index.html Soffen, K 2016, The stunnin" rel="nofollow">ing collapse of the British pound, in" rel="nofollow">in charts, Washin" rel="nofollow">ington Post, Retrieved on 9 August 10, 2016 from https://www.washin" rel="nofollow">ingtonpost.com/news/wonk/wp/2016/06/24/the-british-pound-has-suffered-a-stunnin" rel="nofollow">ing-collapse/ Trade in" rel="nofollow">in goods with Chin" rel="nofollow">ina 2016, United States Census Bureau, Retrieved on 9 August, 2016 https://www.census.gov/foreign-trade/balance/c5700.html Trends in" rel="nofollow">in the UK economy 2015, Office for National Statistics, Retrieved on 9 August, 2016 from http://visual.ons.gov.uk/uk-perspectives-trends-in" rel="nofollow">in-the-uk-economy/ Wearden, G & Fletcher, N 2016, Pound and shares rally after two days of record Brexit losses – as it happened, The Guardian, Retrieved on 9 August 2016 from https://www.theguardian.com/busin" rel="nofollow">iness/live/2016/jun/28/brexit-3-trillion-stock-markets-sterlin" rel="nofollow">ing-ftse-busin" rel="nofollow">iness-live HERE IS A PIECE OF MY OPINION, IF YOU DON’T MIND. NOTE: The literature review is supposed to look at existin" rel="nofollow">ing literature, and it is all generic, constructed around economic concepts. The quantifiable effect of these changes on SPECIFICALLY the Euro and the pound are supposed to be in" rel="nofollow">in the FINDINGS section of the research – what you discovered in" rel="nofollow">in your own research, not in" rel="nofollow">in reviewed literature. One more thin" rel="nofollow">ing, the Brexit was a month and some weeks ago. Economic data is based on a quarterly and annual basis. E.g. The GDP is quarterly and annual. Same goes for in" rel="nofollow">inflation. So, basin" rel="nofollow">ing the literature review on before and after Brexit is not practical but I have in" rel="nofollow">integrated as many as pre and after data as I could fin" rel="nofollow">ind available. Also, the literature review is really long in" rel="nofollow">in 5000 words (18 pages) when most standard dissertations are around 30 pages. This leaves 12 pages for the in" rel="nofollow">introduction, the research questions, hypotheses, objectives, the fin" rel="nofollow">indin" rel="nofollow">ings, the discussion, the limitations, research gaps, and implications for further research. The great word count also creates a lot of space for irrelevant wordin" rel="nofollow">ing and concepts to fill up the word count.