Why did the British pound fall sharply over the past week?

The pound fell to the equivalent of $1.03 on Monday, a roughly 22 percent decline from six months before. (It strengthened slightly, to about $1.08, early Tuesday.) Experts say the pound declined so sharply because many investors are wary of British Prime Minister Liz Truss’s proposal to increase government borrowing to pay for tax cuts. Her government says the tax cuts will generate more economic activity and, in turn, higher tax revenue. But some investors say the plan will lead to a higher budget deficit and more inflation, which had already reached a 40-year peak over the summer. “Exchange range movements are often a mystery because they’re affected by many economic factors, including just the mind-sets of investors,” said Gary Richardson, a professor of economics at the University of California at Irvine. “But it looks like the main trigger is the recent policy move by the British government.” Many major currencies slipped in value against the dollar this year because of the Federal Reserve’s decision to fight inflation by raising interest rates. Last week, the U.S. central bank raised rates by an additional 0.75 percentage points.

What does a falling pound mean for Britain’s cost-for-living crisis?

The plummeting pound will worsen inflation, many analysts say. Much of global trade and transactions is priced in dollars, so more pounds will be needed to pay for internationally traded goods. The United Kingdom’s consumer price index had already risen by 9.9 percent in the 12 months through August, with food prices increasing by 13.1 percent. The cost of imported goods that Britain has to pay for is likely to rise further after the recent currency decline, Eichengreen said. That is a cause for concern because Britain imported 46 percent of its food in 2020. London’s robust financial services industry may also suffer as investors become skittish about the pound’s volatility, Richardson said. A weakened pound could mean foreign investors take less profit after conversions to their home currency. U.K. energy bills are also projected to increase because liquefied natural gas and other fuel are often traded in dollars . About half of the gas used in Britain is imported from the international market, according to the country’s Office for National Statistics , and gas also accounts for about a third of the U.K.’s electricity generation. The weak pound could also push British vacationers to opt for domestic trips or travel to destinations where their currency remains relatively strong. The weak pound, however, could boost British exports. Consumers with access to stronger currency will be more likely to buy British products, Richardson said. In the long run, that might benefit farmers and factory workers in manufacturing-heavy areas, he said. “Imports will also become more expensive, so manufacturers will be able to more easily sell products at home,” Richardson said.

How will the weak pound affect people visiting the U.K.?

People who are paid in U.S. dollars or in currencies that have recently strengthened against the pound are in for “happy days,” Eichengreen said, because their paychecks will stretch further. That means those paid in Australian dollars or Swiss francs, which have also grown in value against the pound, could be poised for a trip to see Big Ben. Tourism accounted for about 9 percent of Britain’s economy in 2019 , with nearly 41 million visitors to the country that year. And the British government appears to be aggressively courting more: It recently announced it would consult with retailers on the return of tax-free shopping for international tourists. “There’s statistical evidence and research showing that people book travel based on prices,” Richardson said. “Britain is cheaper, so more people would want to go there.”

Europe

The British pound just plummeted: What it means for the U.K., tourists

By Kelly Kasulis Cho

Updated September 27, 2022 at 12:04 p.m. EDT|Published September 27, 2022 at 6:56 a.m. EDT

The facade of the Bank of England this month. (Jose Sarmento Matos/Bloomberg News)

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The British pound plunged to a record low against the soaring dollar on Monday, spurring concerns of even higher inflation and prompting social media users to share defeatist memes about the world’s sixth-largest economy.

The country, already reeling from the death of its longest-ruling monarch and the recent ousting of Boris Johnson as prime minister, is in the throes of an “even more severe cost-of-living crisis” due to the plummeting pound, said Barry Eichengreen, a professor of economics at the University of California at Berkeley. “Recovery is not on the horizon” for the foreseeable future, he added.

The pound has been on a downward trajectory against the dollar since Britain voted to exit the European Union in 2016. But it is not the only currency to have shed value recently: The South Korean won tumbled to a 13-year low against the dollar this month, while the Japanese yen fell to a 24-year low. In July, the euro sank to even with the dollar for the first time in nearly two decades.