Commentary – International Variables
In the last 30 years the USA, like the UK, has run persistent and large current account deficits whereas in the years before the USA tended to be a net exporter. Consequently, other countries have found themselves with large amounts of US dollars (and to a lesser extent UK pounds). Many of these funds have been used to buy US government bonds, thereby funding US government budget deficits.
Until the early 1970s the UK, like most other countries, operated within a fixed exchange rate system. Occasionally countries could alter this exchange rate, i.e. devalue or revalue. The UK’s devaluation in 1967 is an example. At the start of floating exchange rates in the early 1970s the UK£ lost value against the US$ – but since the 1980s it has hovered around 0.6.
More recently, after a gentle rise in its value in the early 2000s the UK£ experienced a sharp fall in its value against the US$ – and also the Euro – following the financial crisis of 2007/8. The latter fall was significantly reversed after 2013 though the Brexit vote of June 2016 led to a sharp fall in the value of the £ against both currencies.
The US$ depreciated in value against most currencies in the period from 2000-2007 but following the crisis it has appreciated against almost all currencies, probably because the US was thought to be safe haven for funds.