Why the British Pound Is Stronger Than the U.S. Dollar

For over 20 years, the British pound (GBP) has been stronger than the U.S. dollar (USD). As of July 31, 2020, the GBP/USD exchange rate was 1.32. From 2010 to 2020, the GBP/USD has ranged from a high of approximately 1.70 to a low of approximately 1.23. 

Key Takeaways

  • For over 20 years the GBP has been stronger than the USD.
  • Brexit weakened the British pound currency.
  • In the 21st century, the GBP/USD pair has seen highs of around 2.00 and lows of around 1.22.

Some confusion exists as to why the British pound is consistently stronger than the U.S. dollar despite the United States having a stronger and more powerful economy than the pound coalition, which includes the United Kingdom, Jersey, Guernsey, the Isle of Man, Gibraltar, South Georgia, the South Sandwich Islands, the British Antarctic Territory, and Tristan da Cunha. The simplest explanation is that the nominal value of a country's currency and its economic strength are not always the main drivers of its currency valuation. For example, Japan has the world's third-largest economy as measured by gross domestic product (GDP), over 50% larger than that of the United Kingdom, yet as July 2020, it took approximately 106 Japanese yen (JPY) to equal one U.S. dollar and 139 yen to exchange for one British pound.

Nominal Value vs. Relative Value

The nominal value of a currency is relatively arbitrary. What matters is how the value of that currency changes over time relative to other currencies. Historically, for over 20 years one U.S. dollar has been worth less than one British pound. As of July 31, 2020, the dollar is sitting around 1.32 to one pound. This is down from 1.68 in May 2014 and 1.40 in March 2018. This trend is indicative of deteriorating economic conditions in the United Kingdom, mainly from Brexit, combined with an improving U.S. economy.

It's also worth considering that many more dollars are in circulation than pounds. As of July 2020, nearly 1.93 trillion U.S. dollars were in circulation. By contrast, the total pounds in circulation came to a mere 70.16 billion. To draw an analogy, the 2020 market capitalization of Berkshire Hathaway Inc. (BRK.A, BRK.B) was much lower than that of Microsoft Corp. (MSFT) despite the fact that Berkshire Hathaway's share price is much higher. This is because there are many more outstanding Microsoft shares than Berkshire Hathaway shares.

Consequences of Brexit

On June 23, 2016, British citizens went to the polls and voted in favor of a referendum to leave the European Union (EU), of which the country had been a member since 1973. The "Brexit," or British exit, came about as a result of a populist movement that had grown weary of ceding control of laws and regulations to outside forces in Brussels and feared the effects of what it viewed as unchecked immigration. Economists, most of whom were confident that Britain would vote to remain in the EU, warned of economic consequences that would result from Brexit.

The vote in favor of Brexit shocked oddsmakers and roiled world markets. It also had an immediate and pronounced effect on the British pound, which declined in value by over 8% in the 24 hours following the vote. This is another example of relative value trumping nominal value. While the pound remained stronger than the dollar in nominal terms, investors still abandoned the currency, citing its precipitous decline in relative value.

The pound has been turbulent and volatile since the 2016 Brexit announcement. Near the end of 2016 the GBP/USD reached lows around 1.20. In 2018 there was a slight rebound, peaking at around 1.40 in April 2018. In March 2020, the currency pair reported some new lows around 1.16.

Article Sources

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  7. Federal Reserve Bank of St. Louis. "Liabilities and Capital: Other Factors Draining Reserve Balances: Currency in Circulation: Week Average (WCURCIR)." Accessed August 17, 2020.

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