As the Pound falls to new lows against the Euro, Australian Dollar, New Zealand Dollar and US Dollar, many buyers of overseas property are struggling with the cost of transferring money overseas.
The problem for the beleaguered Pound has been a combination of factors, which look unlikely to disappear in the short term. Firstly, whenever the Bank of England announces further quantitative easing (injecting money into the economy), sterling seems to be devalued. This could be a lack of confidence from international investors, or simply the fact that creating more money makes the currency relatively less valuable per unit. Either way, until the Bank give a clear indication that the policy is no more, further losses are likely. Tomorrow’s minutes from the Bank’s last policy meeting will therefore be crucial.
Secondly, both the UK Government and the Bank of England are happy with a weak Pound. It props up the export industry by making British goods cheaper for overseas markets – and without much else to cheer, UK industrial manufacturing is reliant on being able to sell abroad. So if the economic ringmasters don’t want the Pound to gain strength, why would it?
Third, the recovery is taking longer in the UK because of our reliance on financial services and the level of involvement UK banks had with so-called toxic assets. As other economies get stronger, so do their currencies, and relative to the Pound that makes them more expensive.
With the VAT cut coming to an end, inflationary pressures could lead to interest rate rises in the UK in 2010, which would normally be a positive for sterling. However under current circumstances, a rise in the cost of lending would be disastrous for British businesses and of course the housing market, possibly leading to the ‘double-dip’ recession that has been predicted by some. This, needless to say, could be even more disastrous for exchange rates.
Anyone with a requirement to send money abroad, for example to pay for property or goods, can fix exchange rates in advance by using a forward contract. Most UK currency companies will be able to offer rates on this basis.
