The Predicament Of The Pound


Updated on 17 February 2009 | 8 Comments

What should you do if you need to exchange your pounds for other currencies? Harvey Jones is feeling the pain first-hand.

So the pound keeps falling and falling, and looks set to hit parity with the euro any day now.

Some economists claim this is a good thing, because it slashes the cost of UK exports and makes Blighty an attractive place for foreigners to do their shopping. I was nearly crushed to death by Italian and Spanish tourists in Harrods on Saturday, so perhaps they're right.

The Government certainly shows no inclination to squander billions in a futile effort to prop up the pound, and rightly so, in my opinion. It already has plenty of futile projects to squander our money on.

Our ailing currency may eventually stoke inflation by making imports more expensive, but nobody is worrying too much about that - yet.

But the falling pound is bad news if you are booking a foreign holiday, own a second home overseas, or live abroad while drawing your income in sterling. In fact, it's a disaster.

Norway am I paying that!

I have first-hand experience of this, because I currently spend a chunk of my year in Norway. This was already one of the world's most expensive countries (beer £7 a half-litre, anybody?) but in the last 12 months the crumbling pound has made it a mighty 20% pricier, and that hurts.

Pensioners who retired to warmer climes in eurozone countries are similarly afflicted, with growing numbers now forced to return home to credit crunched Britain.

If you're spending money overseas, even small currency swings can make a big difference, particularly on big ticket items like property.

In the halcyon days when £1 would buy you one _1.44, a property costing _200,000 would set you back around £138,888. Today, with our humbled £1 fetching just _1.064, it would cost £187,969. That, believe it or not, is an extra £49,081. Ouch.. And ouch again.

Few Britons are daft enough to be buying overseas right now, but plenty are likely to be shelling out for a euro or dollar mortgage on an existing home, and cursing the day they tuned into A Place in the Sun.

And if they have retired in the Mediterranean sun, or are one of the much-hyped breed of long-distance commuters who are said to be repopulating northern France, their daily living costs will have spiralled.

So is the pound doomed - and is there anything you can do about it?

Hard currency.

If you're sending a chunk of money abroad, your first priority should be to secure the best possible rate of exchange.

That typically means using a specialist currency broker such as Currencies Direct, HIFX (I use 'em) and MoneyCorp. They trade large sums and offer much better rates than a high street bank ever will.

You can also buy currency instantly over the phone (once you have set up an account), so if you watch rate changes like a hawk (try www.xe.com), you can nip in when the currency swings in your favour.

I did this in October, when the Norwegian krone suddenly weakened, and my £10,000 was worth 13% more than a week earlier. That handed me an extra £1,300, which is a stonking difference, if you ask me. One week later, the pound had slumped again.

Most currency brokers also allow you to lock into a fixed rate for up to two years, to protect you from future currency fluctuations, and allow you to plan your future outgoings.

Some readers may be tempted, or rather panicked, to lock in now, to protect themselves from a potential run on the pound. With some suggesting that UK base rates could fall as low as 0%, I think this might be wise.

Euro de change.

Your decision will partly depend on when you need to send the money. If you have a regular financial commitment such as a mortgage, it may be worth locking in to avert disaster if the pound does go into meltdown.

This is even more important if you are already financially stretched, and further expenses could push you over the brink.

But if you have the luxury of timing your currency trade, there is an argument in favour of hanging on. Because although the pound may look doomed at the moment, this won't last forever.

I don't base this claim on any great economic insight, but the law of what goes around comes around.

Just a few months ago, the dollar looked doomed. Supermodel Gisele wouldn't touch it, demanding her fees in euros instead. Its status as the world's reserve currency was under threat.

And then a few months ago, everybody started rushing back into dollars. Even with the Federal Reserve slashing rates to between 0% and 0.25%, green is still good.

The euro is undisputed king of the currencies right now, but plenty of analysts believe this is unlikely to last. The eurozone is falling into recession and economic chaos in Greece, Spain, Italy, Portugal and beyond raises the chance that one of them will attempt to escape the straitjacket of sharing the same interest rate as Germany. Even the prospect of that happening could cause a run on the euro, making the pound look like a safe haven.

Given the speed and drama of recent financial events, would you bet against a sharp reversal?

Beer money.

I'm currently hoarding my pennies, in the hope of turning them into Norwegian krones when I can get a little more for my money. But I'm lucky, I don't need to shift any currency right now. If I had a regular financial commitment overseas, I might err on the side of caution and lock in.

There is of course another way of reducing currency risk. Stay at home. I'm certainly planning to spend less time in Norway and more in Blighty. The beer is better here anyway.

And if you can't live without your annual exposure to Spanish or Italian culture, no problem, just get down to Harrods.

Comments


View Comments

Share the love