Investors and homebuyers are being urged to cash in on the plunge in the
dollar now, because the pound’s historic rise above $2 may not last for
long.
Sterling smashed through the $2 barrier last week for the first time since
1992 after a shock jump in UK inflation triggered the prospect of higher
interest rates in Britain. At one point the pound hit $2.01, its highest
level for 26 years, before easing back slightly to finish the week at just
over $2.
The “buy one get one free” dollar has thrown up a host of opportunities for
investors, making everything from American shares to property in Dubai look
cheaper than they have for decades.
IG Index, a spread-betting firm, said one of its traders had made more than
£100,000 in a little over a month betting on a $2 pound.
However, consumers and investors who want to make the most of the greenback’s
slide may not have long to take advantage. Even though many analysts believe
the pound should remain above $2 for the next few weeks, the consensus among
economists is that it will not stay there for long.
Last time it climbed above $2, in September 1992, a sharp drop followed after
the pound was forced out of the European exchange-rate mechanism. A few
months later it had fallen to just above $1.50 — a 25 per cent fall.
Few are expecting such a reversal this time, but the average forecast for the
pound in July is $1.97, according to Consensus Economics — a fall of 2 per
cent. This time next year most expect it to drop to $1.91 — 5 per cent below
current levels.
Paul Mackel at HSBC thinks the pound will be back at $1.90 in a year’s time.
He said: “Sterling will probably remain near $2 until the May interest-rate
announcement, when a quarter-point rate hike looks inevitable. But once that
is out of the way, sterling is likely to fall back as the inflation problem
subsides.”
While rate expectations picked up in Britain last week, American rates are
expected to remain at 5.25 per cent or even fall by the end of this year
because of worries about the state
of the US housing market and the prospect of a sharp economic slowdown. This
explains why the greenback has slid against a range of currencies: it is
trading at a two-year low of $1.36 against the euro.
There are some high-profile dollar bears who believe its rout will continue:
investment bank Bear Stearns is predicting $2.10 in the next 12 months, for
example.
However, most economists think you have a rare chance to snap up dollars at
record lows. Even if you do not need them now, you can lock into today’s
high rates using specialist currency-exchange brokers such as HIFX or
Worldfirst for up to two years. So if you are travelling to New York in the
summer, or considering buying a property later in the year, you can still
benefit from a $2 pound.
Chris Towner at HIFX said: “I would suggest you buy dollars now. Traders have
been dumping them in favour of sterling because the prospect of higher UK
interest rates makes the pound a more attractive bet. However, a lot of the
positive news for sterling is already out there and the position is likely
to reverse over the next 12 months.”
The weaker dollar also provides a golden opportunity to snap up a holiday
bolthole on the cheap. The unsettled US housing market has put off many
potential buyers, but there are still opportunities in places such as Dubai,
where the currency is linked to the dollar and so has weakened in sympathy.
David Austin of Property for Life, an investment consultancy, said: “Many
properties in the Bahamas and the Caribbean can be purchased using US
dollars, which makes them a very attractive proposition.”
It could also be an opportune time to buy US shares or an American fund,
because your pound goes further converted into dollars. Fund managers were
already positive about the US on hopes that interest rates had peaked, and
the weaker dollar will give American company profits a further boost because
it makes exports look better value.
Many emerging markets in Latin America and the Far East, including China,
should also benefit because many of their currencies are linked to the
greenback.
The dollar’s fall is not all good news for British investors, though. Nearly
half of the 100 largest companies in Britain make at least 20 per cent of
their sales in the US.
A 3 per cent increase in sterling can wipe 1 per cent off the earnings of
British companies, according to investment bank Citigroup. Some blue chips,
including HSBC, BP and Astra Zeneca, also pay dividends in dollars and these
payments will diminish for UK shareholders.
David Cooper, 48, from Southgate in London, is paying for a Jordan holiday
home in dollars. Cooper, pictured with his wife Rosemin, 37, has decided the
time is right to convert his pounds. He said: “I’ve been keeping a close eye
on the exchange rate since March when we first spotted the property and the
pound was at $1.92. When it went through $2 the time seemed right to move
into dollars.”
Benefit from the surge in sterling
How will the dollar affect my UK investments?
British companies that do a large part of their business in America are
vulnerable because their profits are hit when the greenback takes a tumble.
Stocks that make most of their profits in America include Shire, the drugs
company; Amvescap, the investment group; Carnival, the cruise operator; and
Pearson, the publisher.
However, analysts say that investors need not worry too much because any
negative impact should be offset by the boost to the US economy. Companies
with operations in America may actually benefit as their dollar-denominated
costs fall. UK firms that borrow in dollars will also find their debts
cheaper to pay back.
Investors could move into stocks that pay for goods or services in dollars,
which will benefit from the greenback’s decline.
Richard Hunter at Hargreaves Lansdown expects the supermarkets J Sainsbury and
Tesco to do well, as the goods they import get cheaper.
Morgan Stanley tips BSkyB, the satellite broadcaster part-owned by News
Corporation, ultimate owner of The Sunday Times, and Next, the retailer,
which buys from Asian countries with currencies linked to the dollar. Marks &
Spencer should benefit for the same reason.
What about my US investments?
A weak dollar is a double-edged sword. If you already hold US funds or shares,
now is not the time to bring the money back into Britain because your
profits will be worth less when converted.
But those who want to benefit from the $2 pound by buying into America should
look at a fund such as M&G American or UBS US Equity.
Many professionals have been increasing their holdings in America, despite
fears of an economic slowdown and a mortgage meltdown, because they hope the
Federal Reserve will cut interest rates.
Gil Knight, manager of the Gartmore US Opportunities Fund, said: “Bad news
could be good news. More defaults in the mortgage market should force the
Fed to cut rates and spark a rally in US equities.”
Can I benefit from the exchange rates, even if I don’t need dollars now?
Yes. Many foreign-exchange brokers offer forward contracts that allow you to
lock into a favourable exchange rate now, even if you don’t need the money
for many months.
If you know you will need £200,000 worth of dollars in 12 months’ time, for
example, you can agree the exchange rate now. Whatever happens to currencies
in the meantime, your exchange rate is fixed.
Worldfirst requires its clients to pay a deposit of between 2 per cent and 10
per cent. Last week it was offering an exchange rate of $1.99 on £200,000 in
one year’s time, with a deposit of £20,000. You pay the £180,000 balance in
12 months.
Can I save by shopping on a US website?
In many instances, no. A 30GB Apple iPod costs $262.94 on the US Amazon
website. That’s £131, compared with the UK Amazon price of £158.50.
However, import duty and Vat are charged on any item worth more than £18,
unless the duty comes to £7 or less, in which case it is waived.
Grant Thornton, an accountant, calculates that you could pay about £27 in Vat
on your iPod purchase. That takes the total price, including shipping costs
of £21, to £179 — £20.50 more than you would pay in the UK.
That’s assuming the iPod gets here at all. You can buy CDs and books on
Amazon.com, but it refuses to ship iPods to Britain. Many other US websites
have a similar ban.
There are ways round this. The websites Myus.com and Mailforwarding.biz enable
you to set up your own US mailing address.
They then forward the items to you, although high set-up and shipping costs
mean they are only worthwhile if you are planning to buy in bulk. The US
Ebay site is another option.
For a guide to shopping on the internet, see Revenue & Customs’ website
(hmrc.gov.uk). You can also call the Customs classification unit on 01702
366077.
Should I buy US property?
Your pound will go further when it is converted into dollars, meaning you can
buy a bigger second home. But the US housing market is looking sickly.
Nationally, house prices are likely to fall 0.7% this year, according to the
National Association of Realtors.
Property firms say there is a surge of interest in Dubai, where the currency
is linked to the dollar, but risks include possible oversupply in the
future.
