TNAG-0448-FCO40-513-Sterling-assets-and-balance-of-payments-of-Hong-Kong-1974 — Page 105

ANNEX B

NOTE ON THE EFFECTIVE EXCHANGE RATE

1.

With the widespread floating of currencies and the marked changes in the recent past in the relative values of major currencies, including the US dollar, expression of an individual exchange rate in terms of the dollar has become a much less satisfactory indicator

of value.

2.

For this reason it has become usual to express the value of an individual currency by calculating what is commonly called the "effective exchange rate". This "rate" is the single percentage change with respect to all other currencies since some given base date which would have been expected to produce the same effect on the visible trade balance of the country concerned as the changes in market rates against other currencies which actually took place. Effective exchange rates are now widely used as better indicators for exchange market and other policies than rates for currencies in terms of the dollar.

3. It is in part against this background that many holders have suggested that guarantees be expressed in terms of some form of basket of major currencies. The effective rate calculation provides a practicable way of doing this in present circumstances.

4. There is, however, no single definitive method of calculating the effective exchange rate. The staff of the International Monetary

The most Fund have developed a number of possible techniques. sophisticated of these have been derived from a multilateral exchange

This has in rate model developed by the Fund'■ Research Department. turn been adapted by the UK authorities to provide a relatively straightforward and quick method of calculating the effective rate for sterling. Since September 1973, a calculation of the effective exchange rate on this basis has been published in the Bank of England Quarterly Bulletin (Table 29 of the Statistical Annex).

1

Page 105Page 106