Economic factors: exchange rates

Exchange rates: The price of one country's currency in terms of other currencies

There are exchange rates for pounds against all other currencies, although the ones most commonly quoted are the rates against the euro and the US dollar. 

Exchange rate policies: Exchange rate policies are strategies that the government can adopt in order to determine the exchange rate of a country's currency

• Free exchange rates: Under this regime, an exchange rate is determined by the demand for, and supply of, the currency. As with any 'product', if lots of people want (demand) it, the price of will go up. Conversely, if there is too much available then the price will fall. The demand for pounds comes from those who wish to buy UK goods and services or invest in the UK. The supply of pounds comes from those who need foreign currency in order to purchase foreign goods and services or invest abroad. Thus the exchange rate is influenced by the level of demand for exports and imports and the level of foreign investment. 
  
• Fixed exchange rates: Fixed exchange rates are when a government decides to fix the value of its currency permanently in relation to other currencies. A fixed exchange rate occurred for 11 EU countries when they fixed their exchange rates in relation to each others currency on 1 January 1999 in preparation of the introduction of the euro on 1 January 2002. 
• The UK has a free exchange rate system, meaning that the exchange rate of the £ is determined by supply/demand

Exchange rate uncertainty: Because UK exchange rates are…