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Please forgive the probable naivety of this question. I am not an economics student I am just trying to understand the currency fluctuations that are currently occurring with GBP as a result of our new chancellor's likely incompetence.

In nearly all the coverage, journalists and economists refer to the "risk" of sterling dropping to dollar parity, or worse, dropping below the dollar. I can understand the latter but why would the pound being equal to the value of the dollar be bad? Why is it a sign of health for the pound to be worth more than the dollar? Dollar parity being bad is presented as a self-evident truth by the media and no one bothers to explain it.

I understand the dollar is the global currency post the abandonment of the gold standard and that advanced economies use floating exchange rates rather than fixed rates relative to the dollar but why must they float 'above', surely the US economy is relatively strong globally so why would it be bad for monetary value to be equal to that?

If we were back to gold and $36 was equal to one ounce of gold or whatever, then surely parity would imply that inflation was flat/negligible and low inflation in popular discussions of economics/political economy is usually presented as a good thing.

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    $\begingroup$ Americans are the Joneses; if it's any less than the Dollar, then they're not keeping up. Nothing to do with value. It's status. $\endgroup$
    – Mazura
    Sep 30, 2022 at 3:32
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    $\begingroup$ It's just tradition - the pound has always been worth more than the dollar. Hitting that threshold where it's equal to the dollar means something is seriously out of whack. $\endgroup$ Sep 30, 2022 at 3:40
  • $\begingroup$ It's entirely meaningless: an idea pushed by journalists with very little understanding of exchange rates and all that. The same sort of nonsense comes up when the euro-dollar exchange rate crosses unity. $\endgroup$
    – PatrickT
    Sep 30, 2022 at 12:25

4 Answers 4

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There's nothing wrong with \$1=£1.

Unless it was \$1.50=£1 last week - then it's a big problem - for the people who have £, at least! The people who have \$ will be glad they can buy things from the UK for less money.

Consider that your bank account is measured in dollars, because things you buy overseas are usually priced in dollars. Your bank account now has 30% less dollars than it did last month. Your paycheque has 30% less dollars than it did last month. Are you happy about that?

The only reason \$1=£1 is a bad sign, is that normally it's closer to \$1.50=£1. If it's \$1=£1 now, that means about 33% of the UK economy went up in smoke.

In contrast, since the "normal" level of ¥ is about \$1=¥100, if it was suddenly \$1=¥1 that would be extremely good for people who had ¥, and people who had $ would be annoyed they couldn't buy things from Japan any more. There's nothing actually special about the number 1 - it's just an easy number to fixate on, and drastically different from "normal"

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    $\begingroup$ I'm not sure what you mean by "went up in smoke". It would improve your answer if you could use a more orthodox economic term or phrase. $\endgroup$ Sep 28, 2022 at 17:50
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    $\begingroup$ This helps, thanks. So from this I gather that there is no intrinsic issue with $1 = £1 but rather if the value dropped markedly from say £1.20 to £1.01, this would be a significant relative decline, betokening broader economic upset, such as loss of trader confidence in the British economy. This is in fact what we are currently seeing in the UK, as we have the Chancellor pushing through unnecessary tax cuts whilst increasing public debt (to keep consumer energy prices static) and at the same time the Bank of England raising interest rates yet further to address the highest inflation in G7. $\endgroup$ Sep 28, 2022 at 17:58
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    $\begingroup$ @thomasbishop yes, but notice the BoE restarted quantitative easing today to avert a total financial collapse! (this lowers interest rates) This will of course cause even more inflation and drop the currency further. $\endgroup$
    – user253751
    Sep 28, 2022 at 18:44
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    $\begingroup$ @thomasbishop To put blame on Chancellor seems disingenuous, as the euro seems to be mimicking GBP decline. $\endgroup$
    – paulj
    Sep 28, 2022 at 18:44
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    $\begingroup$ @paulj over the last week GBP has moved against EUR with a very similar profile to how it has moved against USD. The current turmoil started immediately after Kwarteng's move. But somehow it's not to do with that?! $\endgroup$
    – AakashM
    Sep 29, 2022 at 6:53
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Not really my topic, but I agree with the sentiment of the question. I have also always been puzzled by the finance media's focus on exchange rate movements. On the one hand, the country becomes "poorer" on the world market as it can buy less imports for their income. On the other hand, it becomes more competitive as their exports become cheaper on the world market. Which factor dominates for "the economy" seems unclear to me ex-ante (although one might approximate it depending on how much a country imports). Besides the "effect", I think another reason why media care about exchange rates is that they are a signal of the state of the economy, in that investors decided to move funds out of the UK currency for some reason..

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    $\begingroup$ "The country is more competitive on the world market" is a way of saying "I get paid less so more people will buy from me". Is that really a good thing? $\endgroup$
    – user253751
    Sep 28, 2022 at 17:12
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    $\begingroup$ @user253751 Incorrect. As can be see from the decimation of manufacturing in the US. $\endgroup$
    – paulj
    Sep 28, 2022 at 18:38
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    $\begingroup$ I don't feel this response is relevant to my original question. I wasn't asking why, in your assertion,the media fixates upon currency fluctuation. I was asking specifically why dollar-parity or lack thereof is a cause for general economic concern. $\endgroup$ Sep 28, 2022 at 19:38
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    $\begingroup$ @Marc In the short-run maybe, but medium-term you also need to consider the income side which depends on jobs which depeds on competitiveness $\endgroup$
    – Papayapap
    Sep 28, 2022 at 21:18
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    $\begingroup$ Ironically, China has purposefully undervaluing their currency for a long time with the West complaining this to be unfair. An overvalued currency is maybe more problematic than and undervalued one. $\endgroup$
    – Papayapap
    Sep 28, 2022 at 21:24
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A falling pound means imports will cost more. Some imports are necessary - you cannot avoid buying them - so a falling pound will make inflation worse. Additionally, if the pound is falling, you will have to offer higher interest in order to finance your debt, making the government eventually have to raise the money to pay the interest, possibly by raising taxes. In response to higher government bond prices, companies that wish to issue debt would have to pay a higher interest rate to make bond buyers want to buy them when they can buy an (almost) risk free government bond. That makes life harder for the companies: the higher interest payments will eat into their profits.
This is on top of the central bank trying to contain inflation by raising interest rates. Rising interest rates hurt people and companies that have any debt that has interest rate that floats (most UK house mortgages are like that.)

I think some real economists could answer this better than I.

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    $\begingroup$ Welcome to the site. You make some valid points, but if you are saying that higher interest rates lead to higher government bond prices, that is not correct. In fact they lead to lower bond prices - see here. $\endgroup$ Sep 29, 2022 at 19:09
  • $\begingroup$ It's also incorrect that the majority of UK mortgages have a floating rate. The reverse is true, the majority has a fixed rate for the initial 2-5 years. $\endgroup$
    – BrsG
    Sep 30, 2022 at 12:24
  • $\begingroup$ @ Adam. No I'm not saying the price of the bond increases but the cost to the government of serving the bond (paying the interest) increases. $\endgroup$
    – Flynn
    Sep 30, 2022 at 20:18
  • $\begingroup$ @BrsG You're correct. In UK they used to be majority floating, but now 75% are fixed for 2 - 5 years then the borrower has to pay the lenders new rate which will have gone up or re-finance at a new rate which will also have gone up - so higher rates do adversely affect current borrowers, but perhaps not immediately but when they come to the end of the fixed part of the loan. $\endgroup$
    – Flynn
    Sep 30, 2022 at 20:23
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    $\begingroup$ @Flynn In that case perhaps you could edit your answer accordingly, eg to replace "hgher government bond prices" by "higher government bond rates". $\endgroup$ Sep 30, 2022 at 21:20
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There is nothing unique regarding GBP vs Dollar. The euro is behaving in the same manner.

"While the declining domestic buying power of a dollar dominates headlines in the United States, American inflation is having a surprising impact around the globe: Nearly every major currency has fallen dramatically against the dollar over the past six months. " - coin desk , David Z. Morris

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