Price of Euro in British Pound

If you start reading about economics on the Internet, you will come to appreciate the global nature of economics. You can read stories in the United States about monetary policy in China or fiscal policy in Portugal. And you can read news stories in other countries about economic policy in the United States. In the modern globalized world, economic connections across countries are impossible to ignore. Figure 2.2 “Price of Euro in British Pounds, March 2008” presents two stories that show globalization at work. Both share a common theme: the effects of a March 20, 2008, decision by the FOMC to cut the target federal funds rate. “Price of Euro in British Pounds, March 2008” shows the market price of the euro—the currency used in most of Europe—in terms of the British pound. When you travel, you typically exchange one currency for another. For example, an American tourist traveling to France would buy euros with dollars to have money to spend in France. If that same tourist then wanted to travel from France to London, she might take some of her euros and buy British pounds. The graph tells the price she would have paid in February and March of 2008. You can see that, over a little more than a week, the euro became much more valuable relative to the pound. Most notably, there was a big increase in the price of the euro between March 9 and March 19, and then prices settled down a bit. This was a wild week for the international economy. In the United States, the Federal Reserve announced major financial support for Wall Street firms on March 16 and then reduced interest rates on March 19. Around the same time, the European Central Bank (ECB) and the Bank of England in London were also taking actions to try to calm the financial markets. At least for a period of time, they seemed to succeed in stopping the rapid rise of the euro against the British pound. It is striking that much of the financial action was taking place in the United States, yet the markets in which Europeans trade currencies were also affected. The story at the bottom of Figure 2.2 “Price of Euro in British Pounds, March 2008″discusses the response of Asian stock markets to the action of the US Federal Reserve. Markets all over the world increased in value after the action of the FOMC. The actions of the Fed matter well beyond the borders of the United States. Bankers and businesspeople all over the globe are