Currency British pound has fallen to a record low against the USD dollar. It has also fallen against the Euro.Move comes after the United Kingdom British government announced massive tax cuts that will-be paid for by borrowing billions of pounds.
How does a weak currency British pound affect average person?
Value of the currency British pound affects everyone. From buyers to business owners & investors.
This pound Currency increases prices of the things we buy which affects the household budget.
This is because if value of the British Currency pound is low cost of goods bought from abroad increases.
For example:
• Energy - Price of gas used in United Kingdom UK is largely USD dollar based.
• Gasoline - Oil is priced in currency USD dollars so a weak pound can make it more expensive to fill up your car tank.
• Food prices - United Kingdom UK imports 46% of food it consumes mostly from EU currency.
• Technology such as Electronic mobile phones or cars made overseas can be more expensive.
Even things made in British UK can cost more if parts are bought from More other countries.
According to Samuel Tombs of research firm Pantheon Economics an overall falling pound could increase cost of living by 0.5 percentage points next year.
Many are people also think about currency exchange rate when they exchange money for a foreign holiday. When you travel abroad things will-be more expensive if pound buys less than the local currency.
Why has the pound fallen?
Investors around world buy and sell foreign currencies in large quantities. Its purpose is to make a profit by hoping that price of currency bought will-be higher than the currency sold.
Currency pound fell on Friday after the government announced huge tax cuts in mini budget.
It then fell again on Monday to $1.04 pound lowest level against the US dollar Currency.
Jane Foley from Rabo bank said this is because investors are selling pound because they have doubts about the government plans.
He also said: They are concerned that some of the tax cuts that have-been announced will not be fully funded. This will result in a huge amount of debt at a time when the Bank of England is in United Kingdom UK. The government is going to sell some of its shares of debt.
Investor concerns about British UK public finances have also made it very expensive for the government to borrow.
Interest on 10 year bonds which governments sell to investors has risen from just over 1% in January to more than 4% now.
Paul Dales of Capital Economics said it showed investors were worried the government tax cuts would force Bank of England to raise interest rates.
He also said he was concerned about Britain long term growth prospects.
Bank of England is not set to hold its next interest rate meeting until November. However there are speculations that bank may soon step in with an interest rate hike.
Those traveling abroad from united Kingdom UK will now have to spend more pounds.
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How is the value of a currency determined?
Exchange rates are constantly changing as they reflect growing demand for each country's currency around world.
Demand is affected by many things including:
• Economy: Successful economies have strong currencies because other more countries want to invest there. They need the local currency to do so which increases demand & its price.
• Savings: If Bank of England raises interest rates saving or investing in pounds becomes more attractiveas you get more return for your money. Hence demand for sterling increases.
• Prices: If goods or services made in United Kingdom UK are cheaper than those made abroad they are attractive to foreign businesses that need sterling to buy them.
• Public finances: The state of a government bank balance or how much it owes can also affect exchange rates.
• Speculation: The exchange rate is extremely vulnerable to currency speculators who buy & sell sterling based on expectations of future events.
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