INVESTORS are rushing to exchange sterling for “safer” currencies after it plunged to new depths.

Sterling hit record lows against the euro — falling to €1.22 — and a six-year low against the dollar, trading at less than $1.53 on Friday.

The decline follows publication of data showing that Britain’s gross domestic product (GDP) contracted by 0.5% in the third quarter, stoking fears that the country was about to enter a deep recession.

The pound has now dropped more than 27% against the dollar since a peak of $2.11 last November. Against the yen, sterling dived as far as 139.12 yen — its weakest since 1995.

The foreign-exchange firm Caxton FX reported a 438% surge in the number of exchanges from sterling into other currencies last week, mainly into yen, Swiss francs and US dollars. The average transaction size was £235,000.

The torrid time for the pound means Britons holidaying overseas are feeling the pinch.

Anthony Rice at the currency specialist Travelex said: “In real terms, this falling pound means shoppers in the US will, on average, pay 25% more for a pair of shoes than at the beginning of the year.”

Here we look at ways to shield yourself — and profit from — the currency volatility.

LOCK IN NOW

The easiest way to take advantage of exchange-rate movements is to sell sterling and buy strengthening currencies. Exchanging sterling for currencies that are expected to appreciate can be a prudent move.

Capital Economics, a consultancy, has revised its forecast for the start of 2009 down to $1.50 (5% less than Friday’s close of $1.58) from $1.60.

If you converted £100,000 into dollars on Monday at 8am, you would have received almost $173,000 — a figure that fell to $153,000 on Friday.

“People are running to safety,” said Robert Macintosh at Eaton Vance, an investment-management firm in Boston. “It’s interesting how the dollar has been bashed for years and that’s the currency everybody wants to own now.”

BUY CHEAPLY

The pound is faring well against some currencies. It has risen by 16% against the Australian dollar in the past month.

At its peak last week you could get 2.53 Australian dollars to the pound — the best rate since 2004. Financial adviser Hargreaves Lansdown has witnessed a 450% increase in switches from pounds to Australian dollars this month.

The South African rand is also cheap if you are converting sterling. Last week, the rate was 18 rand per pound — the best rate for five years — while Turkish lira were a bargain at 2.7 to the pound.

Rice said: “This rate makes Turkey a great destination close to home where you can enjoy some winter sun without having to travel too far afield.”

BUY AHEAD

Forward contracts allow you to lock in at a certain rate before you need the money. This can protect overseas property owners and buyers. Currency specialists allow you to lock in with a deposit of 10% for delivery up to two years ahead.

If you don’t think sterling will necessarily continue to weaken you could hedge — buy a forward contract for half of what you need and leave yourself open for the other half.

Caxton saw an 89% increase in forward contracts in Australian and New Zealand dollars last week as people locked into their fall against sterling.

If you were buying a property Down Under for, say, A$700,000, it would cost £276,680 at Friday’s exchange rate. If you waited and the rate fell to 2.05 dollars to the pound — the level of two months ago — you would need to fork out around £341,150.

SAFE HAVENS

Wealthy investors have been piling into less volatile currencies — such as the Japanese yen and Swiss franc.

Rupert Lee-Browne, chief executive of Caxton, said: “Clients are looking to de-risk their assets and one of the easiest methods is to place their spare funds in secure currencies.”

The downside here is that interest rates in Japan and Switzerland are low at 0.5% and 2.25% respectively.

Even if you hold these currencies in the UK, the interest you receive will reflect this — so you won’t earn much on the money.

OVERSEAS ASSETS

If you hold assets — shares or property — in the US or Europe, you will now get more when selling up and taking the cash to the UK than you would have done in the summer.

A property worth, say, $230,000 was worth more than £150,000 on Friday. The same property was worth £109,000 at the pound’s peak.

Hargreaves Lansdown has seen a 53% surge in clients selling US properties and share portfolios in the past month.

CURRENCY MOVEMENTS

Spread-betting allows investors to “short” currencies, speculating that one will continue to rise or fall against another. If you bet in the right direction, you will make money — but you will lose if you get it wrong.

Paul Friel at Barclays Stockbrokers said: “We’ve seen a dramatic rise in investors betting on currency fluctuations, especially sterling against the dollar, euro against the dollar and dollar against the yen.”

You don’t need to have the full capital you want to wager. You can, for example, hold a position on £10,000 but only need to have 1% of this. The rest is in effect borrowed and you will have to pay a financing fee, usually set at the London inter-bank rate, currently almost 6%, plus 3%.

CURRENCY ACCOUNTS

If you live, work or draw a pension overseas, this could be useful. Most high-street banks allow you to hold other currencies if you have a sterling-based account. Royal Bank of Scotland and HSBC do not have this requirement, however.

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