60 second guide to the falls in sterlingUK downgrade sees pound value drop again

26 February 2013

Money on graph

The past week has seen a sharp decline in the value as the pound, in anticipation of and then following the UK’s credit rating downgrade and concerns about the UK’s economic prospects.

The value of sterling has tumbled by over 7% against the dollar and the euro since the beginning of 2013. And while today (25 February), it looked as though the news of the UK's credit rating downgrade had not affected the pound's value, it ended the day down a further 0.36% against the dollar and 0.48% against the euro.

Here, we explain why sterling is falling in value and what this means for you. If you have any queries about the fall in the pound, sign up to Which? for just £1 and speak to one of our qualified advisers on the Which? Money Helpline. 

How much has the value of UK currency fallen recently?

On 1st January 2013, the pounds was at the joint highest level that it had been for the entirety of 2012. With £100, you would have been able to buy $163.

The story with the euro has been slightly different. On 20 July 2012, £100 would have bought you 129 euros, but by 1 January 2013, this had declined to 123 euros.

But just two months on, the value of the pound has fallen rapidly against both currencies. You can now only buy 114 euros or $151 with your £100. That marks a 7.3% fall against both of these major currencies since the beginning of the year.

Why has the value of sterling been falling over the past two months?

Just like shares and most other types of assets, currencies are traded by investors. And like the value of those assets, the price and value fluctuates based on the sentiments of those investors that are buying and selling that currency.

Britain's economy still looks fragile at the moment. Economic growth has all but dried up, and Britain could be on the brink of a third recession with five years – a so-called triple-dip recession.

Furthermore, the UK's credit rating – a marker of its ability to repay its debts and how much it pays to borrow – has been downgraded. This makes Britain look like a riskier bet to place your money than before. As a result, some investors will have sold their UK investments, and their holdings of British pounds, helping to drive the value of the currency down. They believe that they can get better growth investing in other countries.

How will the fall in sterling affect me and my finances?

In the first instance, the cost of goods that we import, such as fuel, could become more expensive. Many commodities, such as crude oil, which is used for our cars' petrol, are priced in US dollars. When the pound becomes weaker against the dollar, as has been happening over the past two months, oil gets more expensive to buy in the UK.

Holidaymakers and people who are retired abroad face a raw deal. Their money will not be able to purchase as much foreign currency as they had been able to in the past, and consequently, will have less to get by on.

This could have a serious impact on retirees in particular. As many people in retirement have a fixed income that’s paid to them in pounds and converted into the currency of the country that they're living in, they could see their income falling significantly.

Are there any benefits to a weaker pound?

The chief benefit is that a fall in sterling will benefit any exports that the UK makes. This is because UK products will be cheaper for people from other countries to buy.

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