Pound crashes to near 40-year low: How it affects your money
The pound’s weakness today is somewhat ironic as it comes on the 30th anniversary of Black Wednesday. This is the day when it crashed out of the European Exchange Rate Mechanism, a system that linked European currencies as a precursor to the eurozone monetary union, Jason Hollands, managing director of investment platform, Bestinvest explained.
But the movements now come as the dollar has strengthened significantly against the pound as well as the euro as the US Federal Reserve has been more aggressive in hiking central bank interest rates to bring down soaring inflation.
Walid Koudmani, chief market analyst at financial brokerage XTB said: “The situation with the pound continues to be concerning after it reached a 37-year low against the dollar with the GBPUSD pair dropping around 1% and reaching a low of 1.135 before rebounding slightly.
“While dollar strength is certainly playing into it with the Fed taking significant action to contain inflation, the precarious situation the UK economy finds itself in, further highlighted by today’s retail sales report, is not helping either.”
‘Mighty dollar’ and fearless Fed hit pound
This sentiment is echoed by Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, who said: “This time its decline is being sparked not just by a deteriorating UK economy, but a mighty dollar and the fearless approach by the Federal Reserve in hiking rates.
“Sterling reached fresh 37-year lows, to trade at $1.13, after a worse than expected snapshot of retail sales which highlighted the sharp nature of the slowdown. This has led to expectations that the Bank of England policymakers won’t be as bold as raising rates as their peers around the table at the Fed.”
Streeter added that the ‘Trussenomics’ solution to a contracting economy is “widespread tax cuts and a shock and awe push to reduce energy bills”.
She added: “But there are concerns in financial markets that this big slash and spend policy won’t just add to the UK’s growing debt pile but will also make the Bank of England’s task of lowering demand in the economy and reining in inflation that much harder. That is likely to mean that rates will have to stay higher for longer, hampering future growth prospects even more.”
Import and export impact
Hollands said “currency weakness is a double-edged sword”.
He said: “It is clearly bad news for anyone planning to visit the US in the near future and it adds to inflation pressures in so far as it pushes up the cost of imports on goods or commodities priced in dollars e.g. oil. However, on the flipside it can make some domestic exporters more competitive internationally.”
Koudmani added: “A cheaper pound means exports become cheaper while importing becomes more expensive as the conversion rate begins to favour stronger currency. Furthermore, there are several impacts to travel that may occur, including a lower appeal of travelling abroad as the rate becomes less appealing while conversely, travelling to the UK becomes more tempting as it is effectively cheaper than it was before for USD users.”
Turning to investors, Hollands said the pound weakness is something they need to be “acutely aware of”.
He explained: “For UK-based investors, the strengthening of the dollar has helped mask underlying losses on US shares and global equity funds this year. While the S&P 500 Index of large companies has declined in capital terms by -18% since the start of the year, in pound terms the decline has been just -3.5% because gains made on the dollar has offset share price declines.”
However, Hollands added that for investors thinking of adding to their holdings, “care needs to be taken about using much weakened pounds to purchase still relatively expensive US shares”.
“While the dollar may well climb even higher in the near term, this strong trend won’t go on forever and could reverse once the markets decide that the Fed has reached the end of its hiking cycle,” he cautioned.
Meanwhile, those investing in the FTSE 100 need to be mindful that 70% of revenues are made outside the UK.
“As those overseas revenues – much of which are in US dollars – are translated back into pounds, this should boost UK reported profits and dividends,” Hollands said.