Question

Currency Crises in the United Kingdom and Hong Kong.

please give this case study alternatives such , fiscal Policy with floating Exchange Rates.

and specially focus on UK currency devaluation in the case given .

Answer 1

After leaving the European Exchange rate mechanism (ERM) in 1992, Sterling fell rapidly against the Euro-area currencies, reaching a low in 1996.This was the result of speculators believing that the UK economy would be hit particularly hard given the significance of its financial sector to overall economic performance.

The central bank has to intervene in the foreign exchange markets and use a a managed-floating currency to affect the value of a currency to meet specific macroeconomic objectives.

The central bank might attempt to bring about a depreciation to

• Improve the balance of trade in goods and services / improve the current account position
• Reduce the risk of a deflationary recession - a lower currency increases export demand and increases the domestic price level by making imports more expensive
• To rebalance the economy away from domestic consumption towards exports and investment

Hong Kong’s dollar weakened to its lowest level in more than three decades, as the gap between the city’s borrowing cost and US interest rates widened drawing more dealers into the carry trade to sell the local currency for the green.

The Hong Kong dollar will be able to find support from a fiscal policy that focusses on strong inflows globally into the city’s property and stock markets