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Currencies |
| GREAT BRITAIN POUND |
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| Introduction
| Overview | Structure
| History | Factors
affecting change in exchange rates | Daily
trend of British pound | Weekly
trend of British pound |
| Introduction |
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British pound, having the currency code GBP and numeric code 826
as per the ISO 4217 standard, is the official currency of the
countries England, Scotland, Wales and Northern Ireland that form
the Great Britain. The other names by which the currency is known
as are sterling, British pound sterling and pound sterling, the
last one being the official full name of the currency. "£"
sign is used to denote the currency which is taken from the Latin
word ‘Librae’ that was used for pound in the duodecimal
monetary system. The British pound is divided into 100 equal
pence.
The pound sterling is said to be the oldest currency that is being
used currently. It is also ranked among the top most important
currencies of the world along with United States dollar, Euro and
Japanese yen. Another important fact about the currency of United
Kingdom is that it bears the highest value among the major
currency units of the world. Scottish pounds are often confused as
a separate currency but British pounds and the Scottish pounds are
interchangeable, posses equal value and are accepted throughout
the Great Britain. That’s why it can be said that they are one
and the same.
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Overview
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British pound is one of the most important
currencies in the world. The facts that it is the oldest currency
currently being used and also a highly valued currency among the
major currencies of the world help it earn a third place with
Japanese yen in the list of the most heavily traded currencies of
the world. Few economies also tend to peg their currencies like
Falkland Islands pound, Gibraltar pound and Saint Helenian pound
to the pound sterling. One of the reasons for the heavy trade in
the currency is the location of the largest foreign exchange
trading hub i.e. London in the area where pound sterling is used
as a currency. The currency uses a floating rate regime and can be
easily traded in the foreign exchange markets.
The laws of legal tender regarding pound sterling often
create confusions as they are complicatedly formulized. The
banknotes of the currency issued by the bank of England are
accepted in England and Wales but in Scotland and Northern
Ireland, no banknotes are accepted and the use of promissory notes
is done for the normal transactions. The contraction of the
British economy has led to a highly volatile monetary system and
that is why the value of the currency fluctuates frequently in
comparison with the United States dollar and Deutsche Mark. This
attracts the attention of the investors resulting in more of
investment and more of hedging in the currency.
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Structure
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The structure of pound sterling was very
different from the one prevailing currently
until the decimalization concept was adopted
into the British monetary system in 1971. In the
times prior to 1971, a much complex system of
subdivision was made use of in which one pound
consisted of 20 shillings that were further
subdivided in 12 pence each. That made one pound
equal to a total of 240 pence. The shillings
were denoted with the sign 's' that was derived
from the Latin word 'solidus' and penny was
denoted as 'd' that was again taken up from a
Latin word 'denarius'. After the decimalization
of the currency, one unit of the pound is
divided into 100 equal pence instead of 240
pence.
Now, the symbol for a penny
has been changed from 'd' to 'p' and coinage for
9 denominations is minted that are 1 penny, 2,
5, 10, 20, 50 pence and 1, 2, 5 pounds. The
Royal mint performs the minting function for the
British pound. These coins are accepted as legal
tender only for a certain amount limit and are
not used for the amounts exceeding that limit.
Mentioned below are the amount limits for
different denominations of coins
The bank notes for the
currency are being issued for over 300 years
now. Currently, the notes are issued for the
just 4 denominations that are 5, 10, 20 and 50
pounds. These notes show the portraits of 4
historical characters from the history of the
Great Britain namely Elizabeth Fry, Charles
Darwin, Sir Edward Elgar and Sir John Houblon on
the backside of the note and the portrait of the
queen on the front side. The Bank of England
plays the central bank but the printing function
is performed by different banks for different
notes i.e. Bank of England for the English
notes, Bank of Scotland, Royal bank of Scotland
and Clydesdale bank for Scottish notes, Northern
bank, First trust bank, Ulster bank and Bank of
Ireland for the notes in Northern Ireland,
States of Jersey, Isle of Man.
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| History |
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The British pound sterling is arguably the oldest
currency that is still in use. The word pound comes
from the unit of mass called 'troy pound' and sterling
is taken from the term 'sterling silver' used to
identify high purity silver. For the first time in
history, sterling (high purity silver), as a currency
was introduced, by King Henry II in as early as 1158
though it wasn’t called sterling at that time and
had 'Tealby penny' as the currency unit. Elizabeth I
and her group of advisors launched pound sterling as a
currency in 1560-61 to counter the inflation that
arose due to the debasement of the silver coins that
had been hampering the value of the currency.
Prior to the sterling, in the
early medieval time, coins made of silver known as
sceats were used as a currency and formed the basis of
exchange. In that Anglo-Saxon period, the standard
used as a measure of silver was tower pounds that
weighed around 349.9 grams. Troy pound that is
equivalent to 373.242 grams replaced the previous
standard measure in 1526.
After pound sterling came into
existence as a currency, the disarray in the British
monetary system got efficiently cured up as it had the
required strength to serve as unified and accepted
currency. It held its value even during the situations
of financial crises such as Civil wars and when the
country adopted gold standards in context of valuation
in 1816 during Napoleonic wars. Until World War I, the
economy of the United Kingdom was going strong with a
possession of 40% of the world’s total investment
overseas. The war turned around the whole scenario
making even the strongest economy go instable. The
gold standard was readopted in the year 1925 in order
to stabilize the economy. The great depression during
the 1930s saw the steep decline in the value of the
already recovering currency and after this phase was
over, many attempts of making pound sterling peg to
other currencies were made. Decimal system was adopted
in 1971.
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| Factors
affecting the exchange rates between two countries
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The volatility in the foreign exchange rates
depends upon a numerous macro economic factors that
have different degrees of importance to different
economies of the world. Some special and exceptional
factors affecting the rates may also exist in the case
of different countries. Following are shown the common
factors on which the foreign exchange rate depends
- Flow of imports and exports between the
countries
- Flow of capital between the countries
- Relative
inflation rates
- Fluctuation limits on exchange rate
imposed by the governments of the countries
- Merchandise trade balance
- Rate of inflation in the country
- Flow of
funds between the countries for the payment of
stock and bond purchases
- Relative growth
- Short term
and long term interest rate differentials
- Cost of borrowings
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