The strength of an economy’s currency doesn’t necessarily suggest a stronger economy. The same applies to the comparison between the pound and dollar in trading.
Is the Pound worth more than the dollar? This is not an unusual question because the United States is the most powerful country in the world. Therefore, how is the British pound more powerful than the U.S. dollar. In this article, you will learn more about these two currencies and the underlying reasons why.
Why the Pound worth more than the Dollar
When it comes to comparing currency strength, long-term movements in the prices play a major role than exchange rates. Today, one Pound is worth more than one U.S. dollar. This is ironical since the United Kingdom has a smaller economy than U.S.
If one country’s strength is a bigger worth than the other, it does not really mean it has a stronger economy. For instance, the Japanese yen is considered to be the world’s strongest currency. When the yen is compared to the U.S. dollar, it’s only worth one U.S. cent.
Comparing the worth of a country’s currency with another country’s is meaningless if you base the comparison on a fixed point in time. For you to judge the worth of the currency of a country accurately, you can do it by comparing its value with other currencies over many years. Economic factors such as inflation, supply and demand will always cause relative price to change. These kinds of changes determine their strength.
1. The decline of the Pound
In 2020, the Pound was a bit higher than the U.S. dollar in 2020. Back in 1900 Britain had a vast global empire in that the Pound was almost five times as much as the U.S. dollar. After the world wars and the breakup of the British empire heavily affected the Pound.
For the most of the 20th century, the pound depreciated while the U.S. dollar appreciated. This decline made the sterling Pound to be even weaker. The Pound came to hit rock bottom by the 1980s. it later on came to stabilize between the 1980s and 2020 and it traded for between one and two U.S. dollars.
2. Rise of the Yen
The U.S. dollar has a much higher value than the Yen, which is a result of World War II. Years after the World War II, the Yen got gains making it to become a strong currency. By 1970s, the U.S. dollar was equivalent or rather more than 300 yen.
By 1995 the value of the dollar was below 100 yen. Mostly because of the trade deficits between Japan and U.S.
Is the Dollar Stronger than the Pound 2018?
The value is not always a big deal. What matters most is the changes in the value of that currency over the past few years in comparison to others. Over the last few years, the value of the U.S. dollar has always been less than one Pound . This is because of the declining economic conditions in the U.K. while the U.S. economy keeps improving.
There is some confusion as to why the Pound maintains its strength compared to the U.S. dollar despite its powerful economy. A good explanation for this might be the nominal value of the currency of a country and its economic strength are not major factors for the valuation.
1. Nominal value vs relative value
The nominal value is relatively arbitrary. It is worth noting that more dollars are in circulation than the pounds. As at the end of July 2020, the dollar sits at around 1.32 to one Pound. This is a decline from 1.68 back in May 2014 and 1.40 in March 2018. This trend came about because of declining economic conditions in the U.K.
2. Brexit Consequences
British citizens went to the polls on June 23, 2016, and voted in favor of a referendum to leave the European Union. Most economists were confident that Britain would vote to remain in the E.U. and warned about pending economic consequences in case Britain exists from Brexit.
The Brexit vote had a significant effect on the Pound which its value declined by more than 8% in 24 hours after the vote. This is a good example of the relative value affecting the nominal value. The Pound remained stronger in nominal terms than the dollar, yet investors abandoned the currency since its relative value declined.
At the end of 2016, the GBP/USD hit lows at around 1.20. in April 2020, there was some life as gbp usd peaked at around 1.40. by March 2020, the currency pair hit new lows of 1.16.
What Currency is Stronger than the Dollar?
The value across the world differs and changes from time to time. Furthermore, the currency exchange rate converts the value of a currency into another. A majority of the market strategists are foreshadowing a great weakness in the U.S. dollar over the coming months.
The most worthy Currency in South America is found in French Guiana. The country uses the Euro that has an exchange rate of 1 USD= 0.88 Euro. The weakest one in the South America is the Paraguayan guarani, where one dollar exchange rate is equal to 5,666 Paraguayan guarani.
The value of the USD is higher in most countries’ currencies apart from just a few countries. Countries that have stronger currencies than the USA include;
- Isle of Man.
- Cayman Islands.
Is the Pound the Most Valuable Currency?
The real question is, will the pound get stronger than the dollar? When comparing the pound to us dollar, the Pound is the 5th valuable currency in the world. The Pound might not be the strongest currency in the world, but it’s certainly the oldest. The pound sterling is seen as the most valuable currency and it’s mostly in the global market.
The Pound is among the most traded currencies globally, contributing to 12.8% of daily buying and selling rates. This also means that it has high interest rates. When exchanging one U.S. dollar traders receive around 0.75 pounds in return. The USD/GBP pair is one of the most traded currency pairs with high interests.
In a Nutshell
To ensure that the dollar keeps maintaining or improving its wealth strength, the USA came up with the federal reserve which is the central bank of the USA. Its main job is to provide the country with a safe, flexible and stable financial system. This financial system plays a crucial role in the growth of the dollar in the foreign exchange market.
Therefore, the question of will the pound get stronger against the dollar will always remain a topic of discussion. However, the Pound maintains an impressive dominance over the dollar in recent times. One Pound has always been worth more than one U.S. dollar despite U.K. having a much smaller economy. Note that the price of one currency, when compared to another, does not really mean it has a lot of wealth, strength or power.
In recent times, the U.K. has worked around the clock to maintain the value of the pound in regards to the pound to dollar forecast. This is because it is a matter of national pride not to let the GBP depreciate in value lower than the USD.