24th February 2012
The reasons behind the decline are simple: the Bank of England's minutes, and strength of the euro due to the oil markets. The minutes unexpectedly revealed that two policy makers had voted for an even greater expansion to the asset purchase program calling for an extra £25 billion to be injected into the UK's economy.
Meanwhile, the movement of the Japanese yen against the British pound is an example of the wild swings in the currency market over the past few years, reports Citywire.
Back in the summer of 2007 one could buy 250 yen for one pound. However, going into 2012 that same pound could only buy 120 yen – Japan has become twice as expensive for Brits travelling there.
Why is the yen not suffering too? It is not as exposed to the sovereign debt crisis because the Japanese population funds its own debt, and relies on little more than 5% foreign money.
Will the pound fall further?
Peter Morgan, Mindful Money's economist blogger, says: "If QE continues the value of the pound will fall. This will have a consequence on the cost of imports and could potentially reduce the standard of living in the UK.
"In short, if the current trend continues and the financial crisis worsens the value of the pound is likely to drop in the long-term. Although there may be short-term spikes in the value if foreign investors see the UK as a safe-haven for economies in a worse situation, its long-term value will decline."
Simon Ward, head of economics at Henderson, adds: "Outbreaks of gloom tend to be negative for sterling because market participants regard the BoE as super-dovish, and more liable to ease policy in response to economic weakness than other central banks.
"Gloom also implies financial market weakness, and the UK economy is still perceived as being more closely tied to finance than other economies."
But what about taking advantage of a falling pound?
The weakness in the pound is something of a double-edged sword; it has a number of advantages and disadvantages.
On the one hand a weaker pound will make UK services and UK products more attractive to those from overseas, but on the other hand it will make imports more expensive which could ultimately feed the inflation monster.
But there are advantages to be had for investors too – If you're willing to consider non-sterling assets. You could, for example, pick from the following:
US stock market
While there is always an element of risk, UK investors could look to get exposure to the US stock market either directly through stocks and shares or an investment fund. Either way, the trick is to buy into the right type of underlying asset, seeking companies whose earnings are focused on its domestic economy.
Non-US stock market
If you'd prefer to avoid direct exposure to the UK, then there are a number of companies listed on the FTSE100 that have their earnings in dollars, particularly oil and pharmaceutical companies. For example, blue chip choices include Vodafone and Diageo among others – high overseas earners with big interests in the US.
Buy the currency
Possibly the most obvious and direct way of making money out of a currency is to buy it. For example, the dollar, inevitably, even though the economy is awful, remains ‘the sanctuary', and the Chinese renminbi, undervalued for years, at last looks close to a revaluation as part of our demise, says Citywire.
British savers may have preferred a strengthening pound and a weakening dollar. After all, holidaymakers certainly would – but investors can still profit from the current relationship.
Savvy investors can take advantage of a sinking pound – it's not all doom and gloom. Just pay attention to the underlying source of currency earned when you're investing, as there are ways to use a bruised sterling to turn a profit.
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