From $5 to $1.22 the 200-year journey of the pound against the dollar qar to usd

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One of the most dramatic movements in the financial world following the EU referendum was the fall of the pound aed usd. The pound-dollar exchange rate fell from a pre-referendum level of around $1.49 to a rate today of around $1.22.

In the short term that has been good news for investors with exposure to companies with overseas earnings, particularly in the US where the dollar is strong.

For most of the 1800s until the start of the First World War, every £1 was worth just under $5 usd inr rate. The Napoleonic wars, which weakened the pound, was one exceptional period; as was the US Civil War, which saw the pound temporarily spiking up to $10.

Over much of this period the "gold standard" was in force, which required nations to back the value of their banknotes with the equivalent in gold, establishing stability in exchange rates.


James Carthew, head of research at QuotedData, the analyst, and a former fund manager at M&G, explained: "The expense of the First World War took its toll on sterling as the currency was allowed to float, but Britain returned to the gold standard in 1925 exchange rate aud usd. The advent of the Great Depression in 1931 meant that the gold standard had to be abandoned."

Governments however still viewed fixed exchange rates as desirable, and so in 1940 the pound was pegged to the dollar at a fixed rate of $4.03 usd law school ranking. This deal became part of the Bretton Woods agreement that was signed in 1944, which governed financial relations between 44 countries for much of the mid 20th century.

The aim of Bretton Woods – which also saw the creation of the World Bank and the International Monetary Fund – was to do away with "competitive devaluation" and the strain of maintaining fixed exchange rates baht to usd. All currencies became linked to the dollar, and the dollar itself was linked to gold.

For the pound, the cost of the Second World War meant the fixed rate of $4.03 was unsustainable, and the currency was devalued to $2.80 in 1949.

This was maintained until 1971, when the Bretton Woods system disintegrated – largely due to its inflexibility – and the pound became the freely floating currency that it remains today.

Mr Carthew said: "In the early years of the graph , the UK was sucking in wealth from all its colonies, and this buoyed sterling equity finance investment. In some ways the weakening pound marked the shift as the US took up the mantle of the world’s largest economy from Britain.

"For long periods, while the Government sought to control the exchange rate, sterling was overvalued and this would have hurt UK exporters and would have played a part in the collapse of the UK manufacturing industry." Major change in the pound/dollar relationship

From the beginning of the free-floating pound until the mid 1980s, the exchange rate in nominal terms trended downwards – since then it has been between $1.30 and $2 famous quotes about life. But the picture is different if the inflation adjusted rate change is looked at.

The chart above is taken from research conducted by Prof Elroy Dimson, Prof Paul Marsh and Dr Mike Staunton, all of the London Business School, for a report that was published by Credit Suisse earlier this year.

Far from the pound being on a downward trend, since the end of the Second World War the rate has remained remarkably level in real terms, albeit with significant volatility through the major inflation peaks of the late 1970s and early 1980s.

Elroy Dimson, emeritus professor of finance at the London Business School, said: " Over the long term, the pound has been weak against the dollar, depreciating over the past 116 years by an annualised 1pc – that is largely attributable to Britain’s higher inflation rate, which had the effect of debasing the purchasing power of the pound.

"If you look at the real (inflation adjusted) exchange rate of the pound against the dollar, it has weakened over the past 116 years by a minuscule 0.22pc per year."

David Blake, professor of pension economics at Cass Business School, said: "The chart shows precisely what you would expect – that the real exchange rate shows no real trend from when sterling started floating against the dollar following the collapse of the Bretton Woods agreements.

"This is because the nominal exchange rate will adjust to reflect differences in inflation rates in order to maintain ‘purchasingpower parity’." What it means for investors

Steven Bell, chief economist at the asset manager BMO, predicted the pound would fall further, and is currently "shorting" sterling – betting that the rate will go down.

He said: "The UK’s net asset value built up over 100 years is deteriorating, but it’s also deteriorating because we’ve sold an awful lot of our physical assets to overseas investors uk to us conversion. ARM holdings [the computer chip firm] is the latest.

"You’ve got to expect the pound to weaken, and be one of the weaker currencies until the economy starts growing above trend and the Bank of England looks like it’s going to put its foot back on the raising-rates pedal."

A well-diversified portfolio is key for investors to protect against volatility in any one market, financial planners say call option example. Investing heavily in a single country exposes an investor not only to the performance of that investment, but also to how well that currency performs.

Mr Carthew added: "The story of America taking over from the UK is currently being played out again between China and the US, as China becomes the world’s largest economy and its currency floats more freely exchange rate pounds to us dollars. It makes sense to have some exposure to Asia, but there may be bumps on the way."

• If you are moving money abroad, get bank-beating exchange rates and your first transfer free with The Telegraph International Money Transfer Service


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