The Strength Of Sterling And The Future of The Pound

The recent drop in value of the pound against other currencies such as the US Dollar and the Euro has caused widespread concern amongst businesses and households. As well as rising costs of imported goods, the expenses involved with foreign travelling have also gone up.

Whilst importers have been worried by the decreasing value of the pound, those exporting goods have welcomed the falling exchange rates, as the exported goods are now cheaper to foreign markets, thus encouraging export trade.

The weakened pound has drawn mixed reactions from economists and businesses. Some herald the decline as a necessary means to redress import/export trade imbalances, whilst others view the developments as an ominous indication of a weakening economy.

As a free floating currency, the pound's exchange rate is determined by supply and demand. The more international demand there is for sterling currency, the stronger the exchange rate will be. The current situation of ill economic health following the credit crunch of recent times, has led to the severe weakening of the pound.

Additional factors which must be taken into account are the expected interest rates in the UK. Higher interest rates result in a better return (or yield) on bonds and other Government securities, and so attracts a greater level of overseas capital. Such a rising international demand for the pound would, as mentioned above, strengthen the value of the currency.

Relatively lower interest rates, and in particular the base rate set by the Bank of England, have resulted in a weakened pound.

Secondly, the requirement to correct a large trade deficit – i.e. a distinct imbalance between imports and exports – can also lead to a weakened exchange rate. The need to make exports cheaper and imports more expensive has been a major factor in recent pound valuations.

The current conversion rate for GBP to USD stands at 1:1.601, and from GBP to EUR stands at 1:1.15 according to currency converter xe.com.

Following 2 or 3 years of decline, the British economy has now began to recover. Following political uncertainty in 2010, Sterling then recovered some of its previous stability when the markets approved of the Government's budget deficit strategy.

It seems then that the fate of the pound and any hopes of a <a rel="nofollow" onclick="javascript:_gaq.push(['_trackPageview', '/outgoing/article_exit_link/4420102']);" href="http://uk.queryclick.com/en/conversion-rate-optimisation-cro/">conversion rate optimisation</a> is closely associated with the decision whether or not to raise the base rate from its long standing record low of 0.5%. As we have seen, higher interest rates equates to greater yields which lead to increased overseas investments, resulting in a stronger pound.