A High Exchange Rate Is it necessarily bad news for exporters in the long term? Usually, a higher exchange rate hurts the export sector of economics due to less competitive price of exported goods in the international market. However, during atime period in a previous decade, the French government operated a policy designed to keep the franc strong. Even though employment suffered as French exporters found it difficult to compete in foreign markets, its long-term consequences proved more beneficial for many French industries. To remain competitive overseas, many French producers were forced to reorganise production, cut costs, and modernise in a drive to improve efficiency. Today many sectors of French industry are amongst the most productive in the global economy.

Understanding the history and causes of exchange rate values can help us understand reasons behind current relative exchange rates better. During the early 1990s the Japanese, like the French, experienced a similar rise in the value of the yen. It rose by over 24 per cent against the dollar and by over 43 per cent against the German mark in 1993 alone. Japanese business responded by relocating more of its production overseas, and relying less on export sales. The cost to the Japanese economy was slower growth and unemployment in some periods, something the Japanese economy had seldom experienced in recent times. In the long term, however, Japanese business has benefited from extending its global operations. In the late 1990s, the Japanese economy was in a depressed state, and was unlikely to pull free from this until the south-east Asian economy recovered from its collapse in 1997. But the global spread of Japanese business helped it to spread risk and cushion the loss in profits from the depressed domestic and regional economy.

Figure 1 below shows the pound sterling exchange rate, i.e. a trade-weighted index of sterling against a basket of currencies. It shows clearly the rise in sterling in 1997 and the persistence of a higher exchange rate through to 2008. So, should British exporters have been so worried by the high value of sterling from 1997? Might there not be some advantages in the long term?

UK industry, unlike that in France, went through severe recessions in the early 1980s and early 1990s. On both occasions, UK managers were forced to cut costs as prices were driven down. Whether UK industry can make further substantial efficiency gains to maintain its export competitiveness remains to be seen.

From December 1995 to April 2000 the sterling index rose by 29 per cent, and many exporting industries were finding it difficult (see Figure 1 below). Take the case of Corus (formerly British Steel). The rise in sterling has reduced Corus's profits by over 1 billion per year. As a result, the company has undertaken major restructuring and plant closures and has cut jobs by over 13,000.

\f2.50 100 Japanese yen (100s) 2.25 Australian dollar US dollar 95 Euro 2.00 Exchange rate index 90 1.75 Sterling exchange rate index, Jan 05 = 100 Foreign currency units per $1 85 1.50 80 1.25 1.00 75 2008 2009 2010 2011 2012 2013 2014 2015 2016