Inspite of being a smaller economy why is Pound so strong against $?

Question

The US economy is almost 12 times bigger (in terms of GDP) than the British. Still the pound is a strong currency. Why? How is a currency evaluated?

Answer 1

A strong currency is not linked to the size of an economy. There are a number of factors that affect the foreign exchange rate, the main one being demand and supply of currency. This is derived from how much a country imports and exports.

Imports and exports can easily be managed by the government of any country to manipulate the exchange rate in favor of their own country, by using tariffs, quotas and other taxation methods.

America imports much more than it exports which means that Americans require more foreign currency to buy goods from abroad. Therefore demand for foreign currency rises and the price of other currencies increases compared to the $. This is the main factor that weakens the $ compared to the British £.

It just so happens that historically, wealthier nations were able to export more than poorer nations so they had stronger currencies, however, due to ever increasing globalization, the relationship between a strong economy and a strong currency has disappeared.

In summary, GDP is a misleading figure if you are looking to explain exchange rates. In reality, a huge number of factors affect exchange rates like imports, exports, interest rates, economic stability, foreign investment, economic growth and inflation.

Answer 2

A currency is evaluated in the same way as any other commodity. Demand and supply, say we let the exchange rate be the "price", then how the pound matches up to the US dollar will be determined by the factors driving the demand and supply of both the pound and the dollar. This in turn is determined by the exports and imports of both britian and united states in relation to the rest of the world. Now remember every time some one imports from the us and britian they have to pay in that currency, and everytime the united states or england imports they put their currency in the foreign exchange market, thus supplying their currency to the outside world, This being said in looking at why the pound is so strong we have to consider is britian exporting more than they are importing, thus driving demand and thus the price (currency) of the pound in relation to the us, and what policies is the british using to ensure there exchange rates stay so high.

Answer 3

1)A strong currency is not linked to the size of an economy. There are a number of factors that affect the foreign exchange rate, the main one being demand and supply of currency. This is derived from how much a country imports and exports.Imports and exports can easily be managed by the government of any country to manipulate the exchange rate in favor of their own country, by using tariffs, quotas and other taxation methods.
2)America imports much more than it exports which means that Americans require more foreign currency to buy goods from abroad. Therefore demand for foreign currency rises and the price of other currencies increases compared to the $. This is the main factor that weakens the $ compared to the British £.

Answer 4

All the answers here are plausible, but it is impossible to present a full explanation as it will require a couple of text books. Your question is too general. Are you talking about the GBP historical exchange rate strength or the recent strengthening of it? Historically, during the gold standard years, GBP was traded for more USD just because that was their respective peg to the amount of gold. Bank of England said 1 GBP was to buy a certain amount of gold and that's it. US Federal Reserve valued the dollar at another amount of gold. Thus the difference in the exchange rate between the currencies. Since the gold standard was abolished the exhange rate mostly maintained its balance due to sound monetary managements by the respective central banks. However, if you are talking about certain fluctuations and trends in the exchange rates between the currencies, then there are a million reasons. In any case, the exchange rate per se means nothing and says nothing about the strength of the respective economies. It is the change in the exchange rates that matters and says something. Also, the Purchasing Power Parity is an important indicator.

Answer 5

At one time it was on gold standard.

In 1946 Rs10=1 lb=$2.5

To day it is what you see in the news paper.

Now it is strictly by supply and demand, at the currency market, with 24 hours of line trading.

Some government may participate in the purchase but mostly it is people who set the price at the currency auction.

There are two market, on the spot purchase and future delivery.

Answer 6

i have not looked at the economic indicators of britain. It is likely that there is lot of foreign trade in the world denominated in pound sterling. It probable has a comfortable balance of payments and favourable current account balance. The brits normally are not spendthrifts. Plus they are a close ally of the USA, which I suppose helps. also britain may have Kept interest rates high to ensure that their currency is stable.

Answer 7

Basically we Brits are not importing much more than we are exporting, so the value of our currency is strong.

Answer 8

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