Exchange Rates – The Impact of a Strong Pound

The pound has traditionally been one of the highest valued of all base currency units in the world.

Why does the pound fluctuate?

Exchange rates change because the pound is freely bought and sold on the foreign exchange markets around the world. The value fluctuates – rising when traders buy pounds, falling when traders sell pounds. It has historically been a strong base currency and recent exchange rates put one pound to be worth two US dollars.

Strong pound – position of strength

Many people assume that having a strong pound is to be in a position of strength. But for some UK manufacturers the exchange rates that favour the British pound can be detrimental.

Exchange rates and manufacturing

Having a strong pound is a mixed blessing when it comes to exchange rates, depending on what side of the fence you sit. If you are a UK business exporting goods to America, it isn't good news. For example if you are a British company exporting computers to the American market for a price of £100 each, that £100 is worth more in terms of US dollars when the sterling strengthens. The American retailer than has to pass on that cost to their customers or pressure the British company to lower its prices. The overall impact of the exchange rates can squeeze a UK exporter's profit margin or even squeeze out their business entirely as they can't compete with the US domestic market. It also means that imported computers from America into Britain will therefore be cheaper in sterling terms, so the UK manufacturer can struggle in it's domestic market too.

Exchange rates and the British pound

The exchange rates of the British pound have risen to $2 this year; in fact, the pound has advanced over 20% against the dollar since 2002. But although this can hit manufacturers, the British economy is robust and flexible and can handle appreciating currency. The British economy has grown as consumer spending remains high. Part of the reason for this is easy credit and a strong housing market that makes consumers feel rich, but it's also because of the exchange rates. The strong pound makes goods from Asia even cheaper, meaning retail sales are boosted. Retailers such as Asda which is owned by US Wal-Mart boosted production in Asia where currencies are pegged to the dollar.

The British economy and exchange rates

Although Britain's manufacturing sector is in decline, the economy benefits from the exchange rates and strong pound by making more money selling services such as accounting and insurance brokerage overseas.

Foreign Currency Exchange Ltd is a commercial currency brokerage based in the UK. We help thousands of clients move hundreds of millions pounds across the globe every day. From large businesses to private individuals who wish to send regular payments abroad, you can save money with us by getting better currency exchange rates than with your bank. The Foreign Currency Exchange buys currency at wholesale rates and can help you save money with our fast secure service. For more information contact us now, telephone +44 (0) 20 7989 0000 or email info@fcexchange.co.uk