Exchange rate

The exchange rate is the value (or purchasing power)of a currency in terms of what it can buy of other currencies.
A large share of trading is purely speculative-i.e.currency dealer seeking to make a profit.E.g.buy US dollars in expectation that the dollar will rise against.
The UK operates with a floating exchange rate system.If the demand for sterling rises relative to supply then the external value of the pound will appreciate.If the supply of pounds on the foreign exchange market increase relative to demand,then the pound will depreciate in value.
During 2002 and 2003,the pound was rising against the US dollar(an exchange rate appreciation)
Exchange rates can be quite volatile and size able percentage changes over the course of a few months.
A high pound leads to lower import price-this boosts the real living standards of consumers at least in the short run.
A strong exchange rate helps to control inflation because domestic producers face stiffer international competition from cheaper imports and will look to cut their cost accordingly.