British Pound Sterling vs. U.S. Dollar: A Brief History

Historically, the British pound sterling has been stronger than many other currencies, including the U.S. dollar. The pound’s value was double that of the U.S. dollar as recently as 2007. In late September 2022, one British pound fell to about $1.05. That marked the lowest price for the pound against the U.S. dollar in over 30 years. 

While the pound has long been a strong currency, it has lost some of its strength over the years. It has recovered somewhat since hitting the aforementioned low point last September, but recent British policy decisions have left the pound’s future uncertain.

Key Takeaways

  • Historically, the pound sterling has been strong against the dollar.
  • In recent years, the pound has weakened, and the dollar has strengthened.
  • The dollar may be nearing a reversal as investors look for cheaper assets elsewhere.

British Pound Sterling: A Historically Strong Currency

The pound is usually stronger than the U.S. dollar when making a 1:1 comparison. In other words, if you were to exchange one pound for U.S. currency, you would receive more than $1.00 USD. Of course, exchange rates constantly change, but the pound has been more powerful than most other currencies throughout history.

However, exchange rates don’t tell the whole story. For example, the pound has weakened substantially versus the dollar in nominal terms. However, in real terms (which accounts for differences in inflation), the pound’s weakening against the dollar has been more modest.

The result is that the pound’s purchasing power has declined, but less drastically than the nominal exchange rate might suggest.

U.S. Dollar vs. British Pound Sterling Price History

Nominal exchange rates may not tell the whole story, but the fact remains that the pound’s exchange rate against the U.S. dollar has changed significantly in the past 200-plus years. Let’s discuss a handful of the most significant changes we’ve seen in the exchange rate.

Around the founding of the U.S. in 1776, one pound was worth about $5. For the next 100 years or so, the rate stayed roughly the same. However, it dropped to $3.62 per pound in the early 1800s due to the Napoleonic wars. It’s a running theme throughout history that war heavily influences currency values. 

During the U.S. Civil War, the pound saw its highest-ever value against the dollar — the price was $10 to purchase a single pound. However, the spike was brief, and by about 1875, the rate was back to roughly $5 per pound.

The World Wars and the Great Depression saw more volatility in the exchange rate. First, World War I and the abandonment of the gold standard weakened the pound, driving the rate down to $3.66 per dollar. It rebounded to $5 after the war, then dropped to about $3.25 during World War II.

Since World War II, the pound has generally weakened against the dollar. Today, one pound costs just over one dollar.

The Gold Standard’s History

A quick tangent in the pound sterling’s history, the United Kingdom’s use of the gold standard has a unique and exciting history for anyone interested in economics. The gold standard is a way of managing currency in which a country ties its currency’s value with gold, buying and selling the commodity at a fixed price.

This way of managing currency may be difficult for modern Americans to understand. The gold standard differs from today’s fiat currencies in that people and companies can freely convert paper money into a certain amount of gold. In other words, gold backs the value of a country’s money. 

A fiat currency’s value is not tied to a physical commodity but fluctuates freely on foreign markets. Fiat currencies have value because the government decrees they have value. 

England was the first country to adopt the gold standard in 1821. The country had discovered significant amounts of gold through foreign production and global trade. Governments at the time stockpiled gold to engage in trade with each other, and by the 20th century, a majority of developed nations were using the gold standard. 

Challenges with the Gold Standard

This changed with World War I and accelerated worldwide growth. In challenging political conditions, it became clear the gold standard needed to be more flexible. The gold supply couldn’t keep up with global growth, and governments started holding the pound sterling and U.S. dollar as reserve currencies. Gold holdings began pooling among a few powerful nations. 

The gold standard presents an enticing alternative to fiat currency. For one, the gold standard protects countries from inflation, as governments and banks can’t manipulate the money supply since it’s tied to a physical commodity. However, the politically trying events of the 20th century exposed weaknesses in the gold standard, including inflexibility and inherent supply limitations. No country uses the gold standard today. 

Growing Strength for the United States Dollar

Current events have seen the U.S. dollar strengthen against other world currencies; the pound has simultaneously weakened due to internal struggles.

The U.S. dollar has strengthened compared to other currencies for many reasons, such as lower interest rates and being less reliant on energy imports from Russia. These factors, among others, have led to higher growth rates in the U.S. and a stronger dollar.

The pound has recently weakened due to some of the U.K.’s policies. For example, Brexit has complicated the U.K.’s trade relationships. The country’s decision to leave the European Union undermined many other countries’ trust in the British economy, decreasing the pound’s value.

In addition, political moves from last year, such as former Prime Minister Liz Truss’s push for tax cuts, have caused a selloff of British government bonds. Collectively, these factors have led to a weakening of the pound.

Inflation and interest rates 

A country’s level of inflation and interest rates both impact exchange rates. Countries with low inflation levels tend to see their currency increase in value. Purchasing power rises relative to other currencies, as opposed to countries with high inflation rates which see their purchasing power depreciate. 

Higher interest rates translate to higher returns for lenders. This attracts foreign investment, driving up a currency’s exchange rate. Because interest rates tend to increase when a government tries to manage high inflation, it’s not always the case that high interest rates will translate to a push in a currency’s value. Many factors influence exchange rates beyond these two.  

What a Strong Dollar Means for Investors

A strong dollar might sound good but may have undesirable consequences for investors. For instance, a strong dollar makes imports less expensive and exports more expensive. The same is true for assets, which may lead foreign investors to look for places where their investment dollars go further.

Cheaper imports are usually good for consumers as they allow companies to buy foreign-manufactured supplies more cheaply, which can drive down prices. However, cheaper imports can negatively impact the domestic sales of U.S.-based producers. 

Over the last year, the Federal Reserve has increased its target interest rate, which relates to the dollar’s strength. These moves raise interest rates throughout the economy, increasing the dollar’s strength even more.

But a stronger dollar also leads to a higher cost of capital, which can eventually result in lower investment, earnings, and valuations for U.S. companies. As investors look for cheaper assets elsewhere, the dollar may weaken against other currencies.

Benefits of a strong dollar

A group of people that benefit from a strong dollar are Americans traveling overseas. A strong dollar increases buying power, meaning your American dollar can buy you more in whatever country you visit. Consumers can benefit from a strong dollar because of cheaper imports. 

Companies that import raw materials from foreign countries can do so more cheaply.

The groups most hurt by a strong dollar are arguably domestic companies with large foreign markets. If you manufacture jackets in the U.S., but your largest market is Europe, a strong dollar will make your product more expensive to European consumers, lowering demand overseas. 

Also, if you’re an investor in a company like McDonald’s, which does a significant portion of its business overseas, don’t be surprised if a strong dollar negatively impacts your portfolio. 

Crisis Averted (For Now)

After hitting a low point in September last year, the pound sterling has slightly recovered in recent months. At the time of publishing, one British pound sterling is trading for roughly $1.25. Though a modest recovery in most experts’ eyes, many are hopeful the pound will continue to rise in value throughout 2023. 

Financial analysts will look to the U.K.’s external financing needs and the British housing market’s performance to predict the pound’s future value. 

The Bottom Line

Throughout history, the pound has been one of the strongest currencies, at least in nominal exchange rates. Over most of the past 200 years, the pound’s price has been about $5. For a brief period, during the American Civil War, you could trade one pound sterling for a high of $10. Currently, the pound’s value is closer to $1.25. 

However, the dollar has strengthened against the pound recently, especially since the Great Recession. Factors such as Brexit and recent policy moves have been among the causes of this. While the dollar has seen a robust increase since the Great Recession, it may be near a tipping point, after which the dollar may weaken compared to other currencies.

The post British Pound Sterling vs. U.S. Dollar: A Brief History appeared first on Due.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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