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finance

business

The Exchanging of Currencies

words | Ian Le Breton

As this edition of The Gibraltar Magazine appears, I have just returned from a relaxing break “stateside”, or to be more precise south Florida. I used to live in the Bahamas so Miami, Fort Lauderdale and the rest are very familiar and it was good to go back. Not so attractive were the higher prices I saw for almost everything since my last visit. Whilst inflation is partly to blame, the main reason for this was the sharp reduction in value in recent years of pound sterling against the US dollar. Most readers probably won’t be reaching for their handkerchiefs. I suppose one might argue that if I am fortunate enough to be able to sun myself on Miami Beach, then having to pay a few more pounds for my dollars is tough and I must put up with it. But exchange rates are just as important back home for anyone who commutes regularly across the border, whether it be for business or pleasure. Who doesn’t glance at the bureaux de change boards in Main Street every time they pass? After all, the number of euro (note the plural is also euro, not euros please) we receive for our pound is generally of concern. And it can become critical when spending larger amounts — perhaps on “white” goods or when buying property (can you remember those heady days when buying Spanish real estate seemed to be such a good idea?). But why do rates move so violently? Isn’t the whole point of increased international cooperation — and all these supranational bod-

GIBRALTAR MAGAZINE • MAY 2013

ies like the World Bank and the World Trade Organisation — to reduce such movements? Would it not be preferable to have a fixed exchange rate policy? Well yes of course but that view ignores the importance of the market — subject as it is to the economic performance, imbalance of payments, political interference and the rest. A good example of the difficulties faced by

Considered amongst the safest global financial centres, demand led by international investors since the onset of the global recession in 2008 caused an inexorable rise in the value of the Swiss Franc

a single country in relation to sharp currency swings is Switzerland. Considered amongst the safest global financial centres, demand led by international investors since the onset of the global recession in 2008 caused an inexorable rise in the value of the Swiss Franc. After all, an exchange rate is simply the price of one currency expressed in terms of another — as with any other “product”. In September 2011, the Swiss government in Berne announced a new policy whereby the exchange rate was not allowed to rise above SwFr1.20 to the euro. The policy — an old fashioned “peg” — has continued to this day — helping large Swiss exporters such as Nestlé and Swatch, but at enormous cost to government finances. Of course in the eurozone — those countries that have adopted the euro as a national currency — volatility between the member states has disappeared. But the price has been enormous for many of the members. It is clear to any casual observer that the econo-



The Gibraltar Magazine - May 2013  
The Gibraltar Magazine - May 2013  

Gibraltar's fabulous business and leisure magazine. Crammed full of great features from finance to football, from fashion to arts. Enjoy i...