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About Me


Darren Winters is a self made investment multi-millionaire and successful entrepreneur. Amongst
his many businesses he owns the number 1 investment training company in the UK and Europe.
This company provides training courses in stock market, forex and property investing and since
the year 2000 has successfully trained over 250,000 people.


Tuesday 15 July 2014

Sterling Strength

The strength or otherwise of the price of a currency depends as always on the balance between demand and supply. As there are many factors that can influence these two elements in determining a currency’s price it becomes complicated and, often, a mystery to the casual observer. The price of a currency is that measured when comparing it with another currency. It can, therefore, be different according to which one it is being compared with. These are known as currency pairs. As the world’s reserve currency is the Dollar, it is used as the yardstick with which a currency is valued. The value of pairs which do not include the dollar such as Euro/Pound are calculated by reference to the price of each against the Dollar.

The balance of payments or the difference between a country’s total exports and total imports is a major influence. Demand for exports incurs demand for the currency and demand for imports incurs a need to sell the currency in order to purchase the imports.

The level of interest rates in one country compared to that of another could create demand for the currency offering the higher interest rate. For an investor, however, the higher interest rate may be offset by the risk of losing value in the currency due to other reasons such as inflation. A high rate of inflation could undermine the value of the currency as competitiveness is reduced by the high cost of production. The loss of capital value could more than offset the gain from higher interest rates for such an investor.

A large economy in the developed world with high levels of government debt funded from the issue of government bonds such as US treasuries or UK gilts could create demand for the currency as such debt has been regarded as safe. Recently, of course, the surprising fragility of some sovereign debt has made investors much more wary. It does, however, stress the need to be confident in the strength of the issuer of debt before buying the issue. There are agencies such as Moody’s and S&P and Fitch which examine the strength of a country’s finances and accord ratings so that investors have confidence in the risk being taken for the return obtained. These, too, have been revisited following recent sovereign debt problems.

Speculators can have a big influence on the price of a currency. If investors feel the price of a currency is a one way bet on it rising or falling they can ‘pile’ in to push it further in that direction. Until action is taken to reverse the trend a currency can become very over or under valued. The central banks are big players in the currency market and, as they have the ability to create money, can move the currency with threats of intervention and by actual intervention. They could, in theory, carry on spiking the speculators for as long as it takes to reverse the trend and this can be seen to work unless the trend has been created by investor’s determination that something fundamental needs to be done. ‘Safe’ havens such as the Swiss franc can be under pressure in times of crisis and the Swiss central bank has had to intervene to show speculators that the price is not one way. Investors can suffer a capital loss quite quickly.

Currently, the Euro has been strong without apparent good cause. The Euro area has severe financial problems among the peripheral countries, interest rates across the region are low, economic growth is low or non-existent and yet the currency rises. This causes problems for exporters, reduces inflation such that there is now a fear of deflation. Both, of which, have kept economic growth weak. The central bank appears to be taking inadequate steps to reverse this situation and investors in the currency have enjoyed a, near certain, strong currency. This could reverse very quickly if there were, what is regarded as, firm action to boost economic recovery with quantitative easing or a version of it.

Sterling has also been strong against the Dollar and most other currencies. Investors have a growing confidence in the success of the UK government’s economic policies. The statistical data on economic performance have indicated good growth in the last year. The UK fiscal deficit has not improved as rapidly as hoped but action is being taken to bear down on expenditure and income, or in other words, receipts from taxation have been slow to recover. Taxation receipts are, however, increasing and should only improve as corporate profits rise and overseas companies are encouraged to set up here to take advantage of the better business environment and competitive UK tax rates. The result of this relative success is that many economic observers have a growing sense that interest rates in the UK will be one of the first of the major economies to rise. Investors, therefore, have the prospect of higher returns from an early rise in interest rates and from an appreciating currency. They appear to have a win-win situation and, in an era of low returns, that is too good to miss so they invest in the UK.

The impact of this strong currency has been for inflation to be lower than it would otherwise have been and, indeed, it is now below the Bank of England’s target of 2%. It also makes it more difficult for UK exporters to compete in overseas markets as a strong currency increases the price of goods created here when sold abroad. If this situation were to be regarded as permanent, the impact is for UK business to cut costs further to bring down the price they have to charge and to improve their competitiveness. This increases capital investment and productivity and is in the long term good of the economy. Countries in this situation are then in a virtuous circle of low costs, high productivity and strong exports. It can, therefore be a difficult thing in the short term but in the country’s long term good. It also impacts on the profits of companies that have operations abroad as profits are translated back into Sterling at a higher rate resulting in lower profits. Companies can mitigate this affect by forward sales and by better buying of raw materials. They can also reduce the impact by generating their borrowings in the foreign currency in order to get the advantage of translating costs at the higher rate. Travellers abroad should get a better rate of exchange so that it becomes cheaper to travel abroad and to spend their holiday overseas.

Events such as the general election next year could reverse this trend as the result could bring changes to policy that may not be regarded as good for the economy in investor’s eyes. The Scottish independence referendum could also affect it as doubts about the impact on the currency arise.


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