Why the Pound Has Recovered Against the Dollar Despite UK’s Economic Woes

(CTN News) – the UK’s economy can make you woeful if you live here. Prices of ordinary items like fresh food have risen the fastest in 45 years because of soaring inflation, which reached 10.4% in February.

(If you can find even these food items, supermarket shelves are bare of several items due to shortages, and fresh produce is being affected by energy prices and poor harvests.)

The government has had to subside astronomical energy bills, and homeowners’ mortgage payments have risen, too.

There have been some bright spots, even if ordinary Britons don’t necessarily feel their effects every day. In the last quarter, the UK economy barely avoided recession. Since late September 2022, the pound has regained much of its strength against the dollar.

Why has the pound recovered against the dollar?

In the wake of Liz Truss’s disastrous and short-lived premiership, the pound has soared to a ten-month high. Last fall’s dip was triggered by Truss’s disastrous “mini-budget,” which cut taxes and borrowed.

Financial markets freaked out so badly that Truss resigned, and the mini-budget was canceled. American homebuyers even came to the UK with their strong dollar to find bargains.

Changing hands in the economy is one reason for the pound’s resurgence. The second thing is that natural gas prices spiked after Russia invaded Ukraine and are back to pre-war levels much faster than expected.

Finally, the UK narrowly avoided a recession in the last quarter. Undoubtedly, the economy isn’t doing well, but it’s not as bad as everyone thought.

The dollar has also lost some ground against other currencies, like the pound.

The US was on the right side of the natural gas trade because it has plenty of locally produced gas and other energy, says Jonas Goltermann, an economist at Capital Economics.

As a result, the dollar lost some of its boosts when prices corrected. He said the Federal Reserve, which raises interest rates to control inflation, has also been less aggressive than expected.

A slower pace of hikes has weakened the dollar. Also, a brace of banks collapsed in March 2023, and other issues in the banking sector have hurt US confidence abroad.

Impact on UK’s Imports

Currency is like a marathon that never ends, says Goltermann. He said with the recent banking problems, “it’s a bit like they’re far out in the distance, but they’re starting to limp.”

Last year, the dollar was strong because the US economy outperformed others, “leaving everyone in the dust.”

Of course, the pound’s strength versus the dollar is just one part of the picture. Goltermann pointed out that the UK imports most of its goods from Europe, where people go on vacation.

The pound’s value will impact people’s lives more than the Euro, which has been fairly flat in recent months.

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