British Sterling Pound: Exchange Rate Influences On Value And Investing Options
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The Pound Sterling is the official currency of the United Kingdom. The British currency exchange rate has traditionally been a strong currency relative to other currencies and is one of the oldest monetary currencies. So far, the UK has resisted joining the other European countries in adopting the Euro. It is also one of the most traded currencies.
Traditionally the British Sterling Pound has enjoyed a position as a strong currency relative to the value of other currencies. In recent times, the plight of the US dollar decline has resulted in the British Pound dollar exchange rate reaching a value of over double that of its US counterpart. The UK is a strong exporter of manufactured goods, agricultural products, fuels, chemicals, food, beverages and tobacco. It also depends heavily on tourism and its service related industries.
One of the most famous incidents affecting the currency rate of the Pound Sterling was the event dubbed “Black Wednesday” on September 16th 1992. Famous speculator George Soros sold a reputed 10 billion Pounds short when underlying weakness was detected in the Pound exchange rate. When the Bank of England was reluctant to raise its interest rates to match the European exchange rate mechanism, it was forced to remove the currency from the mechanism resulting in a devaluation. Soros earned over $1 billion dollars from this move and was later dubbed “The Man who broke the Bank of England”.
Factors affecting the currency rate of the Pound Sterling include economic and political factors. Any news that is considered to impact future events can influence expectations and the demand and supply of the British foreign currency. The primary macroeconomic variables that influence exchange rates include: relative inflation rates, relative interest rates, economic growth, employment levels and government controls.
A change in relative inflation rates can affect international trade activity which influences the demand and supply of currencies. For instance, if British inflation rises against US inflation, British goods become more expensive relative to US goods. This results in a decline in US demand for Pound Sterling. At the same time, this also increases the demand for US goods due to US goods becoming relatively cheaper. The supply of UK Pounds for exchange to US dollar increases resulting in a decline in the British to US currency exchange rate.
Interest rate differentials are another major factor that influences decisions on the supply and demand for British currency conversion. Higher interest rates encourage capital inflow as investors chase higher yields and return on their investments. A change in interest rates can therefore influence the investment decisions of market participants which results in changes to the supply and demand of British Pound sterling. A decrease in interest rates is generally considered unfavorable and can result in an increase in the supply of the British currency as participants seek to repatriate to another foreign currency.
US investors who are looking to gain exposure to the British currency exchange rate can consider the Currencyshares British Pound sterling Trust ETF (FXB) traded on the New York Stock Exchange. This fund can be bought and sold the same way as conventional shares.
Everbank also offer a range of products that allow you to gain exposure to the British Sterling Pound. The Worldcurrency CD allows you to earn interest on the British Pound currency. The Worldcurrency Index CD’s (multi-currency CD’s) also have exposure to the Pound. These include the Petrol CD, Prudent Central bank CD and the Worldenergy CD. You can also open a Worldcurrency Access Deposit Account (money market account) in the currency of your choice.
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