A weaker currency – is it all bad news?

Money June 8, 2016

liam

The British Pound has been in the news a lot over the last few days.  Its value has declined following the news that the Bank of England Governor, Mervyn King, voted to increase the size of its quantitative easing programme.

Without going into the ‘how’s and ‘why’s, what does it mean for residents of Britain that its currency has decreased?

In simple terms, going abroad becomes more expensive.  Back in July, you could buy one euro for 78 pence.  At the end of yesterday (20.2.13), it would have cost you 87 pence.  That’s an 11.5% increase in cost, meaning that the cost of buying the same goods in a Eurozone country will cost significantly more than in July.

(These figures of course rely on the fact that you’re paying the right amount for your currency.  WeSwap gets you close, only charging 1% and giving you the true and genuine exchange rate.  Other providers may well charge you nearly 11.5% for your currency, meaning that even in July you’d have paid 87 pence for a euro.  And just now you’d be charged up to 97 pence!)

Back to the currency.  The flip side of this is that the reverse is true for people in the Eurozone visiting Britain.  Their holidays have just gotten a whole lot cheaper, as everything here looks 11.5% less expensive to them.  That in turn should be good for the British economy, as they will come here and spend their money on British services and goods.  This has the knock on effect of creating jobs and growth in difficult times.

More than this, even people who aren’t coming to Britain might be more tempted to buy British goods given the effective discount on them since last July.  So British exporters might see a boost in demand, which again is good for the economy.

So it’s not all bad news; there can be some significant benefits to a weaker currency.  Indeed central banks and governments often aim to weaken their currency deliberately, to bring about exactly the effects described.  They may not always be quite so upfront about it, because the public often have an instinctive dislike for the idea, (not to mention other countries’ governments!), but behind closed doors it’s an agenda that’s often on the table.  This intrigue leads to journalists and pundits positing the existence of currency wars:  secret efforts by different governments to outwit each other in a race to devalue their currency.

Far be it for me to suggest such a thing, but I can’t help noticing that Mervyn King just needed to vote for a motion he knew wouldn’t pass and with that alone managed to weaken the currency.  Sometimes you don’t have to act, just a wink in the right direction can change things for the better…

Elie is Head of Operations at WeSwap

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