So far this year, the British pound has been the best performer among the world’s leading currencies, making good gains against both the US dollar and the euro.
As I write, sterling is close to a 3½-year high against the euro (the common currency of the 17 euro-zone nations). Right now, £1 buys €1.254 euros, which is the highest euro/pound exchange rate since November 2008.
A year ago, when the euro stood at roughly €1.12 to the pound, £1,000 of spending money would have got you €1,120. Today, the same £1,000 buys you €1,254, giving you an extra €134 to spend on your summer sun-worshipping.
Here are five ways that a stronger pound brings financial benefits to Brits:
1. More holiday money
This 12% increase in the value of the pound is great for holidaymakers, because it means that our money goes that much further on the Continent. In effect, it’s a bit like everything you buy abroad being 10.7% cheaper than it was a year ago.
Therefore, you might decide to splash out by buying 12% more than you did last year. For example, in Spain — the number-one destination for British tourists — this could mean 12% more paella, tapas and sangria than in summer 2011.
Alternatively, you can buy the same goods as last year, but pay 10.7% less for these. The choice is yours!
2. Cheaper European holidays
Also, your pounds sterling will go much further when booking foreign holidays. This translates into cheaper accommodation, car hire, travel expenses, meals and drinks. Therefore, your hotel room and train tickets should cost you fewer pounds than they did last summer.
3. Cut-price cars
Thanks to the pound’s increased buying power, we can enjoy cheaper imports from Europe. For example, many of the millions of new cars bought in Britain each year are manufactured abroad and imported into the UK. As the pound strengthens, the cost of these imported vehicles should fall.
Alas, a survey earlier this month from Which? magazine revealed that the price of new cars in March 2012 had gone up by more than a twelfth (8.5%) above inflation over the preceding 48 months. For some best-selling cars (such as the Volkswagen Polo and the Renault Megane), price rises beat inflation by 8.5% between March 2008 and March 2012.
With any luck, the pound gaining ground against the euro will mean the price of new cars will fall later this year. Imported fuel (diesel and petrol) should come down in price, as well.
4. Discounted food and drink
A stronger pound means cheaper imports across the board. This means that it’s cheaper for wholesalers, supermarkets and restaurants to import foreign food and drink.
In effect, a weaker euro should lead to lower prices for imported cheese, ham, olive oil, wine and other ‘everyday luxuries’ imported from France, Greece, Italy and Spain. With prices going down for importers, this could lead to consumers paying less for these goods.
Nevertheless, some businesses may decide not to pass on these price reductions and, instead, boost their own profit margins. Then again, restaurants that do pass on these reductions to their customers through competitive prices should see more diners coming through their doors.
In short, this extra buying power for foreign restaurants based in Britain could mean your favourite local French, Italian, Greek or Spanish bistro will lower its menu prices, putting more money back into your pocket.
5. Cheaper online shopping
Finally, as the pound’s buying power improves, this should lead to lower sterling prices for goods bought overseas.
This includes items bought over the Internet from foreign websites that charge in currencies other than sterling. Hence, if you buy a lot of goods from foreign websites, either as a consumer or a business, then your costs should come down during 2012.
Now for the bad news…
A stronger pound makes UK exports pricier and, therefore, less competitive abroad, especially in the 17-country euro zone. Around half of all UK exports go to other members of the European Union, where a strong pound makes British-made goods less attractive to Continental consumers.
Given that the coalition government wants Britain to ‘export its way to growth’, a stronger pound is also something to be concerned about. By harming manufacturers, the pound’s new-found strength is not all good news.
Even so, with the pound trading above $2 and €1.70 before the 2008 financial crisis, there’s plenty of room for sterling to get stronger still, so please watch this space…