For more than two decades, the British Pound had been stronger and more valuable than the American Dollar. In the 21st century, the highest and the lowest of this currency pair was around 2.00, respectively 1.22. Even with Brexit, the weakened pound maintained its value over the dollar. But why is the British Pound stronger than the American Dollar? To find out the answer to this question and more, keep on reading this article.
Nominal vs. relative value
To compare the two currencies, it is important to look at their nominal and relative values. The nominal value of such a currency is fairly arbitrary. This being said, what matters is how the value of a certain currency performs over time in relation to other currencies. The highest rate ever recorded between the pound and the dollar was $2.649 on the 6th of March 1972, and the lowest was $1.054 on the 25th of February 1985. However, what can be observed is that while the pound is still stronger, its value is clearly depreciating over time. At the same time, another factor worth considering is that there are currently more American Dollar bills in circulation than British Pounds.
Strength is relative
Rather than a more valuable currency, a currency that stands the test of time and increases its value against another currency over the long-term can be considered stronger. Over the last 50 years, however, the pound has halved in value in contrast to the dollar. Taking this into consideration, it comes as no surprise that British investors are turning away from the UK for their investments. Other factors influencing the strength of a currency are inflation, demand, and supply. All these changes and factors determine the real strength of a currency and not its nominal value.
Consequences of Brexit and coronavirus
The British Pound has significantly depreciated over the course of the 20th century, reaching an all-time low in the second half. However, the currency had always maintained its value above the American Dollar. But with the challenges brought upon by the Brexit movement and the Coronavirus, the pound is now more volatile and turbulent than ever. Brexit and its politics played a major role in the development of the pound and its relation to the dollar.
The various events associated with Brexit and the negotiations surrounding it have created numerous spikes over the past 6 years. This led to a high volatility rate between the British Pound and the American Dollar that was not reflected in the Euro and the dollar. On the contrary, before this event, the pound and dollar relation implied less volatility compared to the Euro and the dollar. The Coronavirus continued on this trend and so weakened the British economy.
In summary, if you wish to avoid risking your personal finances in the pursuit of investing, you should start turning to both European and non-EU forex brokers for better chances of success.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.