Is the Pound on the road to recovery?
Transcript
What has happened to the pound recently?
Since the beginning of last year the pound has fallen 16% against the US dollar and 23% against the Euro. And whilst it is the exchange rate with the US dollar that is the one you are most likely to hear about on the news, arguably it is the pound-Euro exchange rate that is more important as over half our international trade is with the Euro zone, and far more people take holidays in European countries than take holidays in the States.
Why has this happened?
As for why, well, exchange rates are relative - the value of any currency is determined in relation to others. For the UK, which looked like it was going to suffer the most from the current global recession, the pound didn't look like a great place to hold you money as an international investor. They sold off their pounds in exchange for dollars and euros, and the value of the pound fell.
How does a weaker pound affect the economy?
There is no hard and fast rule that a strong pound is good and a weak one is bad, as it can very much depend on where you are coming from. A weaker pound makes UK exports more competitive so it should help to give British manufacturers a real boost when global demand eventually picks up and it makes it cheaper for overseas visitors to come here on holiday which should be good news for the British tourist industry. From a long-term perspective a weaker pound is important as it could help the UK economy achieve a better balance, with growth becoming less reliant on consumer spending and with exports playing a bigger role in driving the economy forward.
But it is not all good news, as a weaker pound makes foreign holidays more expensive and increases the price of imports. This can reduce profits of retailers, especially if firms can't pass on cost increases to their customers.
Where do you think the pound might go next?
Exchange rates move about a lot, but it looks like pound may have fallen a little too far, especially against the Euro. Although the performance of the UK economy has been pretty dire, prospects for the Euro area don't look much better. The UK looks better placed to come out of the current recession earlier, so we think the pound could make up some of the lost ground in the coming months. In fact we have already seen an 11% rebound in the pound-Euro exchange rate since January.
But when it comes to the dollar, it's less clear. Like the UK, the US also has to achieve a better balance in its economy and a competitive dollar is likely to be part of that adjustment. We wouldn't be surprised if the dollar stayed close to current levels for a while.