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Purpose Statement
The purpose of this quantitative research paper is to develop the basis of a statistical model that can predict the relationship between the dependent variable US Currency Exchange Rate against British Pound and three independent variables including US-UK Monthly Trade Balance, US Monthly Inflation Rate, and US Monthly Discount Rate. Therefore, the correlation between variables can be stated as the dependent variable US Currency Exchange Rate against British Pound and is determined by independent variables including US-UK Monthly Trade Balance, US Monthly Inflation Rate, and US Monthly Discount Rate.
The most important relationship is between US Currency Exchange Rate against British Pound and US-UK Monthly Trade Balance because both countries are major trade partners and the trade balance between both countries has direct implications for the level of the cross-currency exchange rate. Although, other variables also have a direct impact on the exchange rate levels, however, for the specific study of the cross-currency exchange rate the US-UK Monthly Trade Balance can be considered as the primary independent variable.
Definitions of Variables
US Currency Exchange Rate against British Pound
In simple terms, it is the price of US Dollars in terms of the British Pound. The dependent variable identified for this report can therefore be defined as the value of US Dollars that can be bought with one British Pound.
US-UK Monthly Trade Balance
This is the net amount of the exports and imports of the US to the UK. This is obtained by deducting the value of imports from exports (Koo and Kennedy). If a country has a trade deficit with its trading partners then it implies that it has to borrow to make payments in foreign currency. The demand for foreign currency will have a negative impact on the value of local currency until the balance of payments is achieved (Karl)
US Monthly Inflation Rate
A high level of inflation rate in the country hurts the exchange rate of the local currency and vice versa. This is due to the reason that rising inflation leads to currency losing its value as more local currency is required to make payments for the same level of goods and services (Dornbusch).
US Monthly Discount Rate
The interest rates prevailing in the economy have a direct relationship with the currency exchange rate. The Federal Reserve can adjust the level of interest rate to attract more investment into securities from other countries. This would create a demand for US Dollars and thus, push its value upwards and vice versa.
Data Description
Source: (Federal Reserve; InflationData.com; OANDA; US Census Bureau).
The data of both dependent and independent variables is presented in the above table for period from January 2007 to June 2011. The data has been obtained from different reliable sources such as Federal Reserve Bank and US Census Bureau website and other database portals.
Works Cited
Dornbusch, Rüdiger. Exchange rates and inflation . Massacheusts: MIT Press, 1996.
Federal Reserve. Selected Interest Rates (Daily) H.15 . 2011. Web.
InflationData.com. Historical Inflation . 2011. Web.
Karl, Case E. Principles Of Economics . New Dehli: Pearson Education India, 2007.
Koo, Won W. and P. Lynn Kennedy. International trade and agriculture . New Yoirk: John Wiley and Sons, 2005.
OANDA. Average Exchange Rates . 2011. Web.
US Census Bureau. Trade in Goods with United Kingdom . 2011. Web.
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