Question

If \(\$ 1\) is traded for 1 euro and \(\$ 1.40\) is traded for \(£ 1\), what is the exchange rate between the euro and the pound sterling? Can the dollar appreciate against the euro but not against the pound?

Short answer

Exchange rate: 1 Euro = 0.714 Pounds; dollar can't appreciate against Euro only.

Step-by-step solution

Determine Dollar to Euro Exchange Rate

The exchange rate given is that $1 USD is equivalent to 1 Euro, which means the exchange rate is 1 USD/EUR.

Determine Dollar to Pound Exchange Rate

It is provided that $1.40 USD is equivalent to 1 Pound (\(1.40 USD/GBP\)).

Calculate Euro to Pound Exchange Rate

Since 1 Euro = 1 USD and \(1.4\) USD = 1 Pound, the corresponding exchange rate between Euro and Pound would be:\[\frac{1 \, \text{Euro}}{1.4 \, \text{Pound}} \approx 0.714 \, \text{Euro/GBP}.\]This means 1 Euro is approximately equal to 0.714 Pounds.

Determine Dollar Appreciation

Dollar appreciation against a currency means the dollar can buy more of that currency. Since 1 USD is initially equal to 1 Euro, for USD to appreciate against the Euro, the new exchange rate must be more than 1 Euro per USD. However, if USD appreciates against the Euro (i.e., the dollar value increases), USD cannot simultaneously appreciate against the pound unless the same occurs in GBP comparison.

Key concepts

Dollar to Euro Exchange Rate

Understanding the Dollar to Euro exchange rate is the starting point for many currency exchange calculations. In our exercise, it's given that 1 US Dollar (USD) is equal to 1.00 Euro (EUR). This means that for every 1 dollar you convert, you receive 1 euro. Such a 1:1 rate simplifies many calculations and helps in comparing how the USD values against other currencies.

In real-life scenarios, the conversion rate between the dollar and euro fluctuates due to the foreign exchange market's dynamic nature. This rate is influenced by multiple factors like economic growth, interest rates, and geopolitical stability.

• Trade Balances - A country with a high export rate often sees a stronger currency.
• Economic Indicators - GDP, employment rates, and other indicators influence currency strength.
• Market Speculation - Traders' expectations about future events can also sway the exchange rate.

For practical purposes, knowing the current exchange rate helps individuals and businesses make informed decisions when traveling or conducting international transactions.

Dollar to Pound Exchange Rate

Next, let's dive into the Dollar to Pound exchange rate, an important part of our exercise. According to the exercise, 1 USD is equivalent to 1.40 British Pounds (GBP). Consequently, when converting dollars to pounds, you receive 0.714 pounds for each dollar you exchange. This rate indicates that the USD is weaker compared to the GBP, as more dollars are required to acquire the same amount in pounds.

Important factors that affect the Dollar to Pound exchange include political developments, economic data reports, and central bank policies.

• Political Stability - The current government's strength can impact investor confidence and exchange rates.
• Monetary Policy - Central bank interest rates directly affect currency strength.
• Financial Markets - Investor actions based on these factors further influence the rate.

Understanding the exchange rate is vital for businesses engaged in transatlantic trade and individuals dealing with international money transfers. It assists in predicting costs and profits.

Euro to Pound Exchange Rate

Finally, we combine the above exchange rates to find the Euro to Pound exchange rate. By using the rates from the exercise, 1 Euro equals approximately 0.714 GBP. This means you can receive about 0.714 pounds for every euro you exchange, indicating the Euro is somewhat stronger than the Dollar when matched against the Pound.

Several determinants influence the Euro to Pound rate, including economic conditions, trade relations between the Eurozone and the UK, and Brexit-related adjustments. Key points include:

• Brexit - The UK's exit from the European Union impacts currency strength discussions.
• Trade Policies - Favorable trade agreements or tariffs can shift rates.
• Inflation Rates - Differences in inflation between the regions can cause fluctuation in currency values.

Being aware of this rate is especially critical for businesses operating across Europe and the UK, as unexpected movements can affect profitability and pricing strategies.