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Development in exchange rates
Last modified on 15 June 2011 at 08:25
The recovery in the dollar exchange rate against the euro that began at the end of 2009 fell away again subsequently due to strong growth in the leading European economies. However, the sovereign debt crisis in 2010 weakened the euro, and while we expect a slight weakening of the dollar in 2011 due to stronger economic growth in the eurozone in the medium term we expect the dollar to strengthen from its current position.
The rise in the dollar against the euro that began towards the end of 2009 in response to improved economic prospects in the US accelerated markedly from April as a result of the crisis over sovereign debt among some eurozone countries. By the last week in May, the dollar:euro rate was back at the level of four years ago, not far below the peak seen at the end of 2005. As the US economy strengthens, the likelihood of an early tightening of monetary policy is an added reason to hold the dollar, reinforcing its attraction as a safe haven in uncertain times in Europe.
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| Sources: | IMF International Statistics.
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In recent years movements in sterling have tended to lie between those in the euro and the dollar, but in the present climate sterling has also been perceived as vulnerable because of the scale of the UK budget deficit and weak economic performance. As such we expect the pound to depreciate slightly against both the euro and the dollar in 2011 as the UK economy improves.