Currency fluctuations don’t just affect your summer holiday

Getting ready to jet off for that long-awaited summer holiday? The warmer months are usually the only time we tend to think about the globe’s different currencies and their values. Before packing your bags you’ve probably already considered the following:

  • Where is the best place to get our currency?
  • How much money will we need?
  • Should we get travellers cheques, cash, a pre-paid card or perhaps a combination of all?

But is a holiday the only time we need to think about foreign exchange markets?

Absolutely not. Did you know that currency fluctuations can have a significant impact on the performance of your own individual personal investments?

For example, when the UK voted to leave the EU this had an overall influence on our investment returns.

Sterling has been particularly unstable in 2017, falling sharply amidst fears of a ‘hard Brexit’ from the EU. Prior to the referendum, the exchange rate stood at 1.4947, in other words £1 bought you $1.50. The day we voted to leave the EU, the unexpected result negatively affected the pound, as the UK economy became less attractive to overseas investors.

UK dividends have also been affected.  Many UK companies receive a significant amount of revenue from abroad, and these dividends will have increased in value once converted back into sterling.

Sterling looks set to remain under severe pressure, while Britain’s departure from the EU is negotiated. Another major factor affecting currencies is the interest rate expectations. The prospect of higher interest rates in an economy tends to boost its currency: higher profits on assets in a particular currency make it more attractive, whereas very low rates have the opposite effect.

Many investment funds available through Individual Savings Accounts (ISAs) and pensions have overseas currency exposure. In some cases, a lot of gain or loss can be due to the currency exchange rate rather than the return of the underlying shares or other assets. Whenever there is a large change in any currency, whether it’s rising or falling, there are always winners and losers.

Some businesses will inevitably benefit, others will not. Some households will find their food costs go up, while others will see their money going further by staying home rather than holidaying overseas.

With mixed views on the outlook for sterling, it’s more important than ever to remember that investing is for the long term, and no single asset class will provide strong returns or benefit from currency movements in all economic conditions.

That’s why it’s always a good idea to invest in a well-diversified portfolio that spreads your money across a variety of investments and geographies to achieve the best balance between risk and return, and to review this regularly.

At Investing For Tomorrow we pride ourselves on helping our customers achieve their life goals, from saving for your dream holiday to investing in starting your own business. It’s important to understand how currency fluctuations might affect life choices. If you would like to book a free discovery meeting to learn more, get in touch.