More Exchange Rate Effects

I've tried desperately to find the bit of comment on Radio 4's PM programme this evening as I was driving home by Nils Blythe - if you can find it, let me know.  He basically talked about the exchange rate, and the current events affecting the exchange rate, very much along the lines of what we learnt about exchange rates last week.

We've already talked about how the pound has fallen on concerns about the economy's health.  Analysts have also suggested, Nils Blythe mentioned on Radio 4, that the pound has fallen because the Prudential has taken over AIG's Asian arm, AIA.

The Pru has agreed to pay a whopping £35bn for AIA, and rightly so, Blythe points out, this has affected the exchange rate.  That's because people expect 35 billion pounds to be supplied on to the foreign exchange rate very soon as Prudential coughs up for AIA.  That's a massive increase in the supply of pounds, and we now know that will lead to a fall in the exchange rate (assuming demand stays the same).

Now those people who speculate and look for opportunities to make money on foreign exchange will have noticed this, expected a fall, and so changed their holdings of pounds to suit.  If you expect the pound to fall, you sell your pounds, so that when the pound has fallen, you can buy more pounds back for the same amount you previously had - you make a gain.  So because of this speculative motive for holding money, we've seen that already the exchange rate has fallen because people expect the exchange rate to fall.