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Exchange Rate

Dale

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I have been watching the Pound to Dollar exchange rate and wondering what drives it. Why is the pound apparently dropping faster than the Euro. These against the dollar, as that's the currency that seems to be the benchmark. I've been casually watching these rates since my first overseas order for parts, and I know less about them now than eight years ago.
 
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vagt6

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A lot of it has to do with the weakend economy due to the global financial meltdown last winter, etc. The Brit government bailed out some big banks, just like ours and other Europeans did. This, along with the general recession, reduced tax revenues, depressed real estate and stock markets, etc., etc., devalues the currency.

IF you want to believe what's coming from the Feds nowadays (I never have), the dollar is on the rebound. However, I wouldn't bet on the British pound tanking anytime soon. It's one of the strongest currencies on the planet, and the British economy is resiliant, too.

We'll see. I'd bet the pound won't go significantly lower thann it is right now.

Is the recession over????
 

DrEntropy

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'til th' NEXT one.
 
OP
D

Dale

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Thank you gentlemen,
I can always count on someone here answering my questions and making them seem like intellegent ones. I am thinking that now would be a good time to buy some pounds as they will rise in value against the dollar as they always seem to. Of course, I have thought this in the past and didn't do it, but wished I had. Thanks again
 

Steve

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Here's the official reason why: I receive this information on a regular basis by the way......

Following on from last week, the Pound declined heavily against the Euro, dropping to a low of 1.0880, the lowest level in more than five months, while the UK currency also dropped under $1.60 versus the U.S Dollar. A report on Thursday indicated that the Bank of England may be using the Pound's weakness as a way to boost the economy.

The Governor of the Central Bank Mervyn King also made a statement, following speculation that the BoE will cut the rate it pays financial institutions on deposits. King said that the weakening Pound was "helpful" to the process of rebalancing the economy. The Prime Minister Gordon Brown declined to comment on the Pound's decline, although he told reporters that he welcomes "all the factors that make for a stable economy".
 
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Currency speculation can be notoriously difficult:

At the end of Sept., 2007 the spot rate was $2.0374, with a 1 year forward rate of $2.0156.
https://markets.ft.com/ft/markets/reports/FTReport.asp?dockey=DSP-280907

At the end of Sept., 2008 the spot rate was $1.7825, with a 1 year forward rate of $1.7543.
https://markets.ft.com/ft/markets/reports/FTReport.asp?dockey=DSP-300908

At the end of Sept., 2009 (now) the spot rate was $1.5936, with a 1 year forward rate of $1.5925.
https://markets.ft.com/ft/markets/reports/FTReport.asp?dockey=DSP-290909

Note that in each year the informed opinion was that the future wasn't likely to be much different.

But the pound lost relative to other currencies consistently over the period.

The pound is not worth as much in dollars as it was before- I get roughly $.40 less for my pound than two years ago.

If I bought $100 worth of pounds in Sept., 2007 I'd have 100/2.0374 = Ā£49.08. If I just kept them until today and traded them back I'd have: Ā£49.08 * 1.5936 = $78.21 a loss of $21.78, roughly 10% annually.

Of course, if I'd done the opposite and bought dollars with my pounds I could have made that much... It's a gamble.

Graphs are most useful:
https://www.miketodd.net/encyc/dollhist-graph2.htm

The $/Ā£ exchange rate was most favorable in 2007 when it reached values last seen in the early 1990s, then in the latter half of 2008 its fallen dramatically:
https://www.miketodd.net/encyc/dollhist-graph3.htm


Things seem to have stabilized... until the next upset.
 

DrEntropy

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JamesWilson said:
Currency speculation can be notoriously difficult...

<reverent snippage>

Things seem to have stabilized... until the next upset.

Truer words, dear Sir. :thumbsup:
 

tony barnhill

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Currency speculation is, IMO, the same as betting everything on black 21 at roullette.....if you're not depending on the money for future requirements, go for it....if you're planning a portfolio around it, you need some other solid investments to back it up.
 

DrEntropy

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It's ~ALL~ a crap shoot.

Play th' numbers, play th' odds, play th' frippin' lottery.

Go to Vegas and play th' slots.

Buy bonds or give Bernie your money....

Gettin' outta bed inna morning is about as risky.

Who cares?!?! We live, we die. It's what's in between and what we DO with it.

All else is immaterial.

Fact.

LIVE wifit.

:smirk:
 

tony barnhill

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Didn't mean to upset you, Dale...just tossed my opinion out....'course in the financial world, everybody has one....
 
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tony barnhill said:
Currency speculation is, IMO, the same as betting everything on black 21 at roullette....

True, but "speculation" is sometimes unavoidable- my daughter was educated here in the UK and has a Ā£ student loan, but she now works in the USA and has $ income, so she has to use her dollars to pay sterling debts. It's very possible for exchange variations to severely impact her cash flows. If she needs to repay Ā£1000 annually at $2 it's $2000; if the rate is $1.60 she's out "only" $1600. If the rate falls to close to $1:Ā£1 she'd pay half as much.

So long as the trend is for the pound to continue falling against the dollar she's best advised to keep her debt in sterling; but if the trend reverses, and the pound starts appreciating she'd then be better off borrowing dollars in the USA to settle her UK debts and then use her US income to pay her dollar debt. (ignoring relative interest rates, which have an effect too)

So we watch the spot and forward rates, and trends, and know enough to appreciate that they cannot be "beaten" but hope that they won't "beat" us up too much. It doesn't hurt to watch what's happening:

https://www.nytimes.com/2008/10/22/business/worldbusiness/22iht-dollar.4.17174760.html


and these macroeconomic forces seem to remain favorable to the dollar.....

and it seems that the UK government implicitly favors a "weak" pound as an economic stimulus- one the encourages sales to foreign buyers and discourages imports....
 
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