The Strong Pound (GBP)

[Pauline]

Last year the GBP was bouncing around between $1.50 - $1.60 (USD). Today it is at $1.72. Speaking as one whose income is in USD and who was hoping for a pound worth $1.25, putting a nice British pile of stones within reach, I am disappointed.

When we lived here for the first two months of 2008, the pound was around $2.10 (USD). That helped us make the decision to not stay in England (and to not have meals in restaurants). When we moved here in May 2010, it was around $1.55 making things expensive but not out-of-this-world-expensive.

This is how financially astute I am. When we were recently in Europe I thought the Euro was way down against the dollar, so things were really cheap. But it was the pound the Euro was way down against. It was $1.36 for €1.00.

That said, you can do an inexpensive trip in England because vacation rentals (holiday cottages) are plentiful and well priced. Petrol (gas) is expensive but the island is small, so you don't drive as far.

 

[Roz]

Another problem for Americans is that a lot of French rentals are owned or managed by Brits, and we have to pay in pounds. So it's more expensive than paying in euro.

Just curious, Pauline -- is there any particular reason why the pound is so strong? Or is it that the dollar is so weak?

 

[Pauline]

I will get Steve to post his thoughts about the pound (because he knows more than me about this), but I think the government made efforts to weaken the pound during the recession so that British exports were affordable, and now that the economy is recovering, they are bringing the pound back to previous levels. Also, they are worried about inflation, so are planning to raise interest rates, so investors wanting to get better returns may move into British pounds.

I didn't realize that about French rentals! I thought they would be priced in Euro.

 

[Steve]

I don't claim any expertise on what causes currencies to move up or down against each other, but I am definitely interested since I live in the UK and rely on US dollar based income. In my simple-minded understanding, the pound is as strong as it is because it is neither the dollar (where the Fed's statement that it doesn't intend to raise rates soon is highly credible) nor the euro (where the ECB is on record as being more worried about deflation, lack of growth, and unemployment than inflationary pressures).

One factor that seems to be particular to the UK is that it is currently experiencing a boom in housing prices. The head of the BOE is on record as worrying that the bursting of what may be a housing bubble could derail what otherwise looks like a decent economic recovery. Apparently if you're a currency trader, this suggests that UK interest rates will start to increase in the near future (to limit increases in house prices by making mortgages more expensive) despite the statement by this very same person that the BOE plans to maintain the current low interest rates for some time to ensure that the recovery and economic growth have achieved escape velocity and can be sustained under "normal" (i.e. higher than current) interest rate conditions.

I guess if the housing boom here cools off, the pound could also fall in value (since an early rise in interest rates would look less likely). This doesn't look likely to happen soon from where I sit. On the bright side maybe some of the speculative UK homes are being offered as vacation rentals, keeping prices reasonable?

 

[Roz]

Thanks for the explanation, or at least speculation, Steve. All this currency stuff really makes my head spin.

In California there is also quite a boom in housing prices recently, but I don't think it is US-wide. And as you say, an interest rate rise in the US does not seem very likely soon.

 

[Steve]

From what I read, the US housing market is continuing to gain strength and not only in California. This should be promising for the economy - and, we hope, the dollar - in the longer term since a strong housing market would spread its benefits to other areas. If nothing disrupts this promising trend - a premature interest rate hike from the Fed, say - the dollar should maintain reasonable buoyancy with regard to other currencies.

Over the last year or so, the dollar has had occasional upswings associated with serious global crises (Ukraine, middle east, etc.). The dollar is still seen as a safe haven, so money flows into the US in these situations, but exits again as events are perceived to stabilize. I want to see a stronger dollar, but as a result of healthy, sustainable economic trends, not because of a long-term serious new crisis - you have to be careful what you wish for!