[MUSIC] At this point in this particular section, I think it would be interesting to look at some individual currency, some of the world's important currency. And see how different events are influencing their value to see whether how all this theory we're discussing, make sense, and then I'll ask you to do a little bit of practice with the dollar yourselves. So just starting out, this first graph, I've got, in all graphs, actually, I have the currency against the US dollar. So we're not exploring what the dollar does, we're exploring what the other currency does. So here we've got, in the first graph, the yen against the US dollar, and there's a really interesting picture here, where there was a tsunami as you know in 2011, and it lead to a strengthening of the yen. And you might say, why on Earth? Well, what happened was, the Japanese that had assets abroad, and the government which had assets abroad and needed money to rebuild the economy, started selling those assets and bringing the money back into Japan. So there was an increase in demand for yen. You might think the yen would fall because of fear of what was going to happen in the country. But instead it rose because the Japanese were liquidating assets and bringing them home to be able to rebuild Japan. The second slide is the euro against the US dollar. And here, you can see something else that's very interesting. You can see how, in the 2008 crisis, the euro falls. Now, this is a rise in the dollar. And it's interesting to think that even though the US was in many ways at the center of that crisis, the safe heaven affected the US dollar caused it to go up against the euro. And then you can also see the eurozone crisis 2010 and 2011 when the bailouts began, and the doubts over whether the eurozone would break up. And you can see again a fall in the euro. The next slide shows you the British pound sterling, the British pound. And I want you to just notice two important points here, over on the right which are the Brexit vote in 2016 which cost the pound to fall to its lowest level since sometime in the 80s. It had a drastic effect on the pound because people lost confidence in how Britain was going to be managed in the future, and how its economy would perform if it left the EU. Then you can see a more recent event, the vote where Theresa May's Conservative party, I did not do well in the snap elections and you can see again, a fall in the pound, because of this lack of confidence. Confidence is a really important determinant of the value of a currency. The next slide, you can see the yuan. And here, it's interesting to see at the very beginning of the slide, I've given a very long time period here. The beginning of the slide you can see the Yuan strengthening, going down would be actually that it costs fewer Yuan to buy a dollar. So it's a stronger Yuan. You can see it strengthening, and then you can see it weakening at the end of the chart, basically since 2014, 2015. This would have to do with confidence. Fear that China's slowing down, fear of Brits debt. Chinese citizens taking money outside of the country, so supplying Yuan, which would reduce its value. Also expectations, and then the reality of US interest rate rises which drew money into the United States. You can observe all of those things happening in the one graph. And the last one I have here is the Rupee. Where you can see, again, that those crisis years, and talking about the global financial crisis and then going on as the euro crisis continues, 2010 on sort of a flight to quality, where you're seeing people wanting to get out of emerging market assets and moving into, say, US dollars, and so this weakens the Rupee. You can see the Rupee usually weakens, and this would be effect of higher Indian inflation. But you can also see near the end of the chart, that the Modi victory caused the Indian Rupee to be one of the best performing emerging market currencies. You can see its rise and its stabilization there. So those are some examples in reality of how these factors work. What I'd like you to do now is to grab that piece of paper that you've had around here as we've been talking through this course, and I'd like you to draw a supply and demand diagram. Let's think about the US dollar. So again, you're going to draw on the vertical axis, you're going to put the price of the dollar, the exchange rate. And just to make our lives simple, when we go up that way, the dollar's rising. And when we go that way, the dollar's falling. On this axis, we have the quantity of dollars traded. And I want you to draw a demand curve which slopes downward, as we move from left to right. And a supply curve that moves upward, that slopes upward as we move from left to right just as we've done so far. And I've done it sometimes for you on the board. Then find your equilibrium where the two curves intersect. That will be the value of the dollar. And I'm just going to throw some things out to you. And I want you to think about the supply and demand diagram. And which curves moves and what happens to the dollar. So the Fed raised interest rates yesterday, let's say. What's going to happen? Well, your answer should be the demand curve shifts out to the right, and you can see, the value of the dollar going up. Now, sometimes people are expecting that interest rate change to occur, and so they have already demanded dollars before the event. So that often happens. All right, let me take you to a complicated one. The surprise Trump victory. Let's think our way through this. The dollar rose suddenly after Trump won the election. Why would this happen? Well, people expected Trump to cut taxes to deregulate the economy, therefore they expected businesses to do very well. So they wanted American assets, increase in demand. But they also expected that the US Central Bank, the Fed, would raise interest rates to slow down the economy, because as you know in understanding economic policy making, this economy could be driven past potentially, it could over heat. So they expected an interest rate rise that also caused them to demand the dollar. So what about when Obama Care was defeated in the House? When the plan to reform Obama Care, the health care system in the United States was defeated in the House the first time? What would happen? Well, this would cause a demand for dollars to then shift in again, because people would say, maybe the Trump agenda wont be carried out, maybe there won't be taxes because there won't be deregulation. So I don't expect so much growth, and I don't expect so much higher interest rates, demand will move inward. Let's assume that there's a big scandal surrounding the presidency, what do you think would happen? What would be typical would be for people not to want US assets because they're not sure what's going to happen. Now, if it's a global financial crisis, often the money will come to the United States but if it's centered in the United States, the money might leave. What if US announces an unexpectedly good GDP growth figure? Well, the effects should be that the demand curve for dollars shifts out to the right, because investors expect a good economy, they're more willing to buy an assets, the dollar goes up. What if the US exports many more goods than it used to? Well, this will cause the supply curve for dollars to shift out to the right, because we're supplying more dollars to buy the currencies and buy those foreign goods. The dollar should go down. Okay, work with this, think about it on your own, practice with some of the simulators that you find in the course. And I hope you can dominate this so that you feel comfortable starting to even predict where currencies are going to go. [MUSIC]
