Q&A: What could push the pound higher?

The pound has been hit hard by the global downturn and at one point had lost around a fifth of its value against the dollar.  But it has been recovering recently after the emergency budget and on interest rate increase hopes.

Why has the pound lost so much of its value?

There are a number of reasons why the pound has been under pressure during the economic crisis including nervousness about the global economy, concerns about the state of the UK’s finances and record low interest rates.

When markets are afraid, why do people sell the pound?

Actually, when investors take fright – as they have done again over recent months – people buy the dollar.

Like gold, the dollar enjoys a reputation as being a safe-haven. That means that people holding other currencies sell whatever they have to buy the dollar in times of crisis.

That explains why the recent worries about the high levels of government debt in Europe led to falls in sterling. Nervous investors wanted to buy the dollar and sold the euro and the sterling and other currencies to pay for it.

Is that because the US recovery started earlier and is stronger than in Europe?

No. The dollar is seen a safe store of value because so many commodities are traded in dollars and countries must have holdings in dollars to do global trade, which means they keep a store of the US currency and suggests it will continue to keep its value.

So currency movements don’t reflect economics?

Currency movements in part reflect the perception of the relative strength of one economy over another.

To buy one currency, you have to sell another. That means that any trade is a pair trade and reflects a view not only of the economy whose currency you are buying but also how it compares to another economy.