Can your company risk losing £1,000's?
In the last 3 months, sterling has strengthened by 10% against the US dollar, recovering from $1.45/£1 to all but hit $1.60/£1 a few weeks ago– the highest in 6 months. This equates to a 10% discount on all goods for companies that import in US dollars.

Before we take a brief look at why this has happened and what to expect over the coming months, make sure you get in touch with a currency specialist to secure the best rate possible by calling 0207 898 0500.

Over the last 18 months, the US dollar has enjoyed what is known as ‘safe haven’ status. Much like when ships head for shelter in a storm, investors have bought the US dollar in order to hold safe investments and ultimately avoid losing their money. The safest investment has been US government bonds. What happened, for example, following the collapse of Lehman Brothers, was that the US dollar strengthened and then rather strangely, when strong data started to come through, investors bought more US dollars in order to benefit from the potential interest rate hikes that better economic data brings.

However, in the last 3 months, there has been a change in how the US dollar is being bought. Following 3 quarters of positive growth, the US economy has begun to lose steam. A stalling housing market and poor employment data has caused investors to question the ‘safe haven’ status of the world’s biggest economy and recent GDP growth figures came in far worse than expected. In addition, interest rates had been widely expected to start rising later this year, but Federal Chairman Ben Bernanke made clear recently that the Federal Reserve could look to do the opposite – pump more money into the economy to add some stimulus. Not what investors wanted to hear.

In the UK, confidence was at rock bottom when the election failed to secure a majority government. Since then though, the new coalition has addressed fears over strong government with decisive action – both through the emergency budget and wide ranging spending reviews – and the financial markets have to all intents and purposes given David Cameron a stamp of approval over his plans to aggressively cut the budget deficit.

In addition, UK economic figures have impressed recently. GDP growth estimates almost doubled what had been expected, showing expansion of 1.1% in the 2nd Quarter of 2010. Industrial manufacturing and services data has also showed expansion which in turn adds to investor confidence in the UK. There is a concern however that the aggressive spending cuts will stifle growth in the next 12 months, and this has limited the pound’s upward run at $1.5999/£1 – the highest seen for 6 months.

Where now? With the psychological barrier of $1.60/£1 seen as a ceiling to further strength, there is not much scope for movement above that level in the short term without an unexpectedly positive piece of data. The bigger risk is that the optimism will fade out and the pound returns to $1.55/£1. Do what so many of our clients do and take advantage of the stronger pound, fixing in rates using forward contracts. With such huge percentage swings in exchange rates, one thing is clear: you should be outsourcing your currency requirements to a specialist to help guide you through the volatility of foreign exchange markets.

For more information on Smart Currency Business call: 0845 638 0571 (or +44 (0)207 898 0541 from outside the UK) or visit our website at: SmartCurrencyBusiness.com