Fool's Eye View

[ November 24, 2000 ]

The Perils Of A Weak Pound

By Nigel Roberts (TMFNigel)

Chippenham, Wiltshire -- For what seems like years we have been hearing British industry moaning that it has had to put up with a pound that is too strong. We will soon be hearing people moaning that the pound is too weak.

This morning, against the US dollar, the pound was trading very close to a 14-year low of $1.4 to £1. This compares with an exchange rate if $1.64 pound at the start of the year. In 11 months the pound has lost nearly 15% of its value against the US dollar. Compared to the euro the pound has fared a little better: at just over 60p to the euro the pound has strengthened by 4% since the start of the year.

What does this mean for the British economy?

Much of our trade is still conducted in US dollars. This means that, in dollar terms, UK companies will now get 15% more pounds for every dollar they earn. Companies manufacturing in the UK are, in theory, more competitive than they were at the start of the year against American companies. But of course much of the raw material that UK companies buy is also priced in dollars, and so their raw material costs have also risen by 15%. So where we win on the swings we lose on the roundabouts. You watch, British manufacturing companies will soon be moaning at the increasing prices they are having to pay for imported raw materials.

What about the price of oil?

Oil is universally priced in dollars, so even if the price of oil had not been rising in dollar terms we would all be paying more for our petrol in pounds. If the pound falls further against the dollar, and the price of oil in dollars continues to rise, then the price of oil in pounds will rise even faster.

What about overseas earnings?

British companies have significant investments in the United States, and so any profits that are earned in dollars have to be translated into pounds in their accounts. A weak pound against the dollar means that these foreign earnings translate into more pounds, and a weak pound is generally good for large UK multinational company profits.

So who will be the winners and losers of a weaker pound against the dollar?

Winners

• UK companies with substantial profits generated in the US
• British oil companies
• Exporters of products priced in dollars
• US tourists visiting the UK

Losers

• Large importers of products bought in dollars
• UK motorists who will have to pay more for fuel
• Consumers buying imported goods
• UK tourists visiting the USA

Who really cares?

Is the level of the pound really important? I am sure that it is. But in my working lifetime I have seen the pound vary massively against the dollar. I can remember it hitting $2.44 at the end of 1980, and a low of $1.05 in February 1985.

What I do know is that we can have absolutely no impact on the level of exchange rates, and that their future movements are totally unpredictable. The UK economy has coped with volatility in the value of the pound in the past and it will cope with it in the future. A low pound against the dollar simply means that the general view is that interest rates in the UK are more likely to fall than rise while in the US the reverse is true. And falling interest rates are good news for all of us with mortgages. So, Fools, when you see headlines about a falling pound, and you see the spokesperson for British Industry starting to moan about its adverse effects: don't worry, be happy!

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