The currency conundrum

There has never been so much interest in foreign-exchange rates. The euro-dollar rate and the volatility of sterling have become almost as popular as property and taxation in water-cooler conversations. You even hear people discussing the foreign-exchange markets when they are out for a drink in the evenings,

At least part of this is due to the strong linkage between currency valuations and geopolitical events. Every time President Trump tweets, it seems to have some impact on the dollar, or at least there is expectation and trepidation that it will have an impact.

The recent German election is another case in point. The failure of Angela Merkel's CDU to gain a sufficient share of Bundestag seats to allow for the formation of a two-party coalition saw the euro lose two cents on the dollar within 24 hours. This is largely because the German chancellor is widely credited with providing the steady hand on the tiller which guided the eurozone out of the crisis which threatened to overwhelm it back in 2010.

But there are also hard realities to take into consideration for both individuals and businesses. For example, if an individual buys a particular share and it’s dollar-denominated, they are exposed both to normal market risks as well as currency risks. The stock could go up 10 per cent in value but the individual might actually have lost 3 per cent on the investment because the dollar has fallen in value by 13 per cent since the shares were bought.

There is still the question of what the individual with the dollar-denominated shares should do. Buy or hold? Wait for a recovery in the dollar or take the risk that it might deteriorate further in value? These are questions only the individual can answer and factors such as their financial circumstances and the shares invested in come into play.

Another factor which has to be taken into account is the current trend in the eurozone which seems to be pointing towards a long-term strengthening of the euro. This is largely due to the increase in the inflation rate across the eurozone. This will, in turn, place upward pressure on interest rates and bond yields, which will have a positive impact on the value of the currency.

That might suggest some relative stability there, but as we have seen in the wake of the German poll, volatility is never more than an election result away. Take the US presidential election result, for example. The dollar strengthened initially but then when President Trump was unable to implement some of his protectionist policies, it started falling again.

Current turbulence

The current turbulence on the foreign-exchange market has particular relevance for Irish people living in the UK. There is a huge community of London-Irish commuters. They have set up in London with a view to coming home in the longer term and they now find themselves with a sterling savings pile which has been eroded significantly by the fall in the value of that currency. If they want to sell their London property, they are finding it has fallen in value in line with the property market there and that the amount they get for it is worth even less when they bring it back home to Ireland. They then face a triple whammy due to the rise in Ireland’s house prices.

Irish exporters also face huge problems. When the exchange rate was around 70p they were very competitive, now when it’s hovering around 90p they are facing real challenges, particularly if they haven’t been able to hedge their exposure.

Everyone affected needs to put in place a strategy that protects against further adverse moves. But nobody can tell you where sterling will be one year hence or can predict the way the Brexit negotiations will go.

Possibly the best advice to people is not to sit on savings in the hope that things will go back to the way they were. Converting a portion of them into euro now might appear unpalatable but will seem like a very good deal if the currencies go to parity. I have seen people sell dollars through gritted teeth at 1:10 because they had bought them at 1:05 but were very glad when the dollar went out to 1:20.

At Moneycorp, we allow our customers to buy and sell as and when they see fit. It’s not an all-or-nothing option. Our customers get access to real-time rates and our very competitive fees mean that transferring even small amounts of money is worthwhile.