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REASONS FOR MOVEMENT IN U.S DOLLAR AGAINST POUND SINCE JANURAY 2007

RISING AND DECLINING INTEREST RATES AND INFLATION RATES

For the first time since 1992 the dollar traded at $2 to the pound, this is because of the fact that U.K inflation surprised to the upside & the slowdown in U.S inflation (www.currencytoday.co.uk, January 2007). In January 2001, the British pound received a boost against the dollar when central bank of England raised interest rates to 5.25% which represents parity with American interest rates (www.forexblog.org) .Levi (2005), suggests that declining exchange rates tend to be associated with relatively high interest rates and inflation, also the fact that increase in money supply lowers the interest rates and whereas a fall in money supply raises the interest rates Kwapong (2005), governments increase interest rates to defend their currencies when their currency falls in value on the foreign exchange market (Levi, 2005).

From the above it can be said that growing rate of inflation and interest rates in the U.K during the first quarter of 2007 was the cause behind the fall in value of U.S dollar as compared to the British Pound which can also be supported by the fact, according to the fisher effect, a rise in the country's expected inflation rate will eventually cause an equal rise in interest rate that deposits of its currency offer (Krugman, 2004) also the fact that since the middle of 2006 this correlation has weakened. Inflation concerns in the UK led the Bank of England to raise interest rates in late 2006 and 2007. This caused sterling to rise to its highest rate against the euro since January 2003. This had a knock on effect with other major currencies, and the pound hit a 15-year high against the US dollar on 18 April 2007, having reached US$2 for the first time since 1992 the day before (www.poundtoeuro.com).

RISE AND FALL IN REAL ESTATE PRICES

The looming fall in real estate prices has officially spread to the rest of the U.S economy, on the other hand the U.K pound has been growing strong against the U.S dollar because of the fact that the bank of England being reluctant to cut its benchmark interest rates which at 5.75 % remains highest among the world's major currencies (www.forexblog.org, October 2007). This fall in real estate prices can be because of the weakening of the U.S economy in latter period of 2007, falling real estate prices are directly dependent on economy which can be suggested by the fact that if the underlying economic and demographic indicators are strong and demand for housing is growing then the prices go up and vice versa (Thomsett, 2007).

The fall in real estate prices and the demand for housing going down is due to the current economic recession which can be suggested by the fact that notwithstanding, the current recession to a greater extent than previous ones has primarily affected households. This has directly affected the U.S dollar which has depreciated steeply, in 2008 the worsening of recession ...