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#1
Old 07-22-2003, 01:32 PM
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Why is the British Pound Stronger than the U.S. Dollar?

I went to the UK in the mid 90s & was surprised to discover that the exchange rate from U.S. dollars to British pounds was roughly $1.50:1 pound.
What accounts for that?

I guess the reason I thought the U.S. dollar would be stronger was based on an assumption that the U.S. had a stronger economy with more exports and Gross Domestic Product than the U.K.

Why has the British pound historically been stronger?
I checked today & the dollar is 1.59779 USD to a pound, around what it was a few years ago.

And while we're at it, why is the Canadian dollar weaker than the U.S. dollar?
#2
Old 07-22-2003, 01:50 PM
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You're missing the point. The fact that a pound is worth more than a dollar doesn't make it "stronger". The relative strength of a currency against another is measured by change in value over time.

Now consider that fifty years ago, the pound was worth several dollars- the fact that it is now worth far more is the measure of its strength.

If you're wondering why the pound started higher, its because the Bretton Woods conference (which established the IMF and World Bank, among other things) set them that way based on gold stocks.
#3
Old 07-22-2003, 02:26 PM
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Exchange rates fluctuate all the time for all sorts of different reasons. You can't point to the exchange rate and say, "Ah, one US dollar equals 88 Icelandic Kronur. So therefore the US economy must be 88 times stronger than the Icelandic economy!" It just does not work that way.

Here's one reason why. Suppose country A and country B start out with an exchange rate of 1 unit of A's currency for 1 unit of country B's currency.

Then suppose country B prints a bunch more country B money--they *double* the total supply of country B's currency. This will (eventually) lead to prices doubling in country B. This in turn will lead to a change in the exchange rate: now 1 unit of country A's currency will buy *2* units of country B's currency.

Mind you, the actual economic strength of the two countries hasn't changed at all: both countries are producing just as many goods and services as they did before. It's just that country B has experienced a little (OK, a lot of) inflation.

So if two different countries increase their respective money supplies at different rates over time, the exchange rate will change over time as well ... even though the real economic performance of the two countries hasn't changed a bit!
#4
Old 07-22-2003, 02:38 PM
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Quote:
Originally posted by dutchboy208
Now consider that fifty years ago, the pound was worth several dollars- the fact that it is now worth far more is the measure of its strength.
Yes, the dollar's strength, not the pound's. Before WWII, the pound was worth about four dollars but the general trend since is for them to be getting closer together in value.
#5
Old 07-22-2003, 03:03 PM
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The US dollar was orginally set at the value of the Spanish dollar and was linked to the price of gold (as well as silver until 1900) as was the pound. In 1791, shortly after the birth of the dollar, the price of the pound was $4.55 and as the two were both linked to gold/silver the price remained pretty constant until WWI.
#6
Old 07-22-2003, 03:51 PM
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The pound has been in a range since it broke from the ERM but has rallied since 9-11ish. Weak stockmarket drove investors into short rates which drove them out of the the US because real UK short rates are a couple hundredish basis points over real US short rates (which are negative). The US dollar lost its safe haven appeal after the terrorist attacks over fears about the economic impact and uncertainty over how the US might change it's position on monitoring banking activities.
#7
Old 07-22-2003, 04:34 PM
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Since 1947:

http://miketodd.net/encyc/dollhist-graph.htm

You will note that the pound was devalued over 30% in 1949 and 14% in 1967. It narrowly avoided dipping below the dollar in 1985.
#8
Old 07-22-2003, 06:39 PM
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Quote:
Originally posted by everton
Yes, the dollar's strength, not the pound's. Before WWII, the pound was worth about four dollars but the general trend since is for them to be getting closer together in value.
Sorry... worded that incorrectly.. thanks.
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