One would assume that the strongest economies would have the strongest global currencies; however, that is not always the case. It turns out that long-term movements in currency prices are more important than exchange rates, which is why the British pound is worth more than the U.S. dollar. But this does not change the fact that the U.S. dollar is the world's most traded currency and the world's reserve currency.
- Despite the U.K.'s smaller economy, the British pound has historically been worth more than one U.S. dollar.
- The price of one currency compared to another is not necessarily an indication of wealth, power, or strength.
- A currency that increases in value against another over many years is generally considered to be a stronger currency.
- Currency values are sometimes arbitrarily reset by governments, especially after periods of high inflation.
- Even though the pound is worth more than the dollar, the U.S. dollar is still the world's most traded currency and the world's reserve currency.
When one country's currency is worth more than that of another, it does not necessarily indicate a stronger economy. For example, the Japanese yen is regarded as one of the world's strongest currencies, yet a Japanese yen is worth only about one U.S. cent. Historically, one British pound has usually been worth more than one U.S. dollar, even though the U.K. has a much smaller economy.
Never mistake a high exchange rate for a strong currency.
The fact is that looking at a currency's worth relative to that of another currency at a static point in time is meaningless. The best way to judge a currency's strength is by observing its value in relation to other currencies over many years. Supply, demand, inflation, and other economic factors will cause changes to a currency's relative price. It is these changes that ultimately determine the strength of a currency.
The Decline of the British Pound
Although one British pound was worth a little more than a U.S. dollar in 2021, it used to be worth a lot more. Britain had a global empire in 1900, and the British pound was worth almost five times as much as the U.S. dollar. World War I, World War II, and the breakup of the British Empire took a heavy toll on the pound.
The U.S. overtook the British empire as the largest economy in the 1890s, and the dollar became the world's reserve currency shortly after World War I in the 1920s.
During much of the 20th century, the British pound depreciated against the U.S. dollar. This decline made the pound a weak currency, even though it was worth more than a dollar. By the 1980s, the value of the British pound hit a bottom. Between the 1980s and 2021, the pound stabilized against the dollar and usually traded for between one and two U.S. dollars.
The Rise of the Japanese Yen
U.S. currency is worth more than Japan's yen mostly because of World War II, but gains by the yen since that time made it a strong currency. In the early 1970s, the U.S. dollar was worth more than 300 yen. The value of the dollar dropped below 100 yen by 1995, in part because of persistent U.S. trade deficits with Japan. Even though the U.S. dollar was still worth more than the yen, the yen was a stronger currency because it was rising in value.
In fact, currency prices can be reset at different values. For example, a national government could decide that there has been too much inflation and create a new currency. It might be 10, 100, or even 1,000,000 times the value of the old currency. For example, the Mexican government introduced a new peso in 1993 that was worth 1,000 of the old pesos. This is another reason that exchange rates and numbers at face value have little to do with the actual strength of a currency.
Why Is the Pound Worth More Than the Dollar?
The pound is higher than the dollar because long-term price movements play a role in the face value of a currency. At one point, the British pound was five times higher than the dollar, but over the 20th century, due to the two World Wars, the loss of the British Empire, and other negative factors, the British pound lost value and significantly depreciated, to a point where it now typically sits between one and two dollars.
Is the British Pound Always Worth More Than the U.S. Dollar?
Yes, the British pound is always worth more than the U.S. dollar and has historically been so. It has never been worth less than the U.S. dollar, though the gap in value has significantly closed over time as the British pound depreciated significantly in the 20th century.
What Are the Strongest Currencies in the World?
The strongest currencies in the world are the Kuwaiti dinar, Bahrain dinar, Oman rial, Jordan dinar, Pound sterling, Gibraltar pound, Cayman Islands dollar, euro, Swiss franc, United States dollar, and the Canadian dollar.
What Is a Good Exchange Rate for Pounds to Dollars?
A good exchange rate for pounds to dollars, meaning using pounds to buy dollars, is when the pound is strongest against the dollar. The stronger the pound is to the dollar, the more dollars you will get for your pounds. As of Oct. 8, 2021, 1 pound will buy 1.36 dollars. If the pound strengthened in a few months, and 1 pound bought you 1.5 dollars, this would be a better exchange rate.
The Bottom Line
Although the British pound is worth more than the U.S. dollar, the dollar is still a stronger currency due to its status as the world's reserve currency and its greater volume of trading in the forex markets. The U.S. economy is a stronger economy than that of the U.K., and so a greater value is placed on its currency, even if the exchange rate means that one dollar buys less than one pound sterling.