What a weak pound means for your money as Sterling hits all-time low against US dollar

The pound hit an all-time low against the US dollar this morning – but what does this mean for your money and the global economy?

Sterling plunged by more than 4% to $1.0327 in early Asia trade – its lowest level since the decimalisation of the currency in 1971.

The pound has since rebounded slightly to $1.08 on Monday afternoon off the back of reports suggesting the Bank of England could be prepped to make a statement.

Against the euro, the pound was trading at €1.12 this afternoon.

There are several reasons why the pound is falling – with analysts blaming Chancellor Kwasi Kwarteng’s Mini-Budget and a strong US dollar.

Here, we explain the direct impact this could have on your finances.

What does a falling pound mean for your holiday?
If you’re heading abroad and the value of the pound has fallen, then you won’t get as much for your money.

For example, at its highest point this year in January, the pound was worth $1.37 against the US dollar, while it hit $1.42 last year.

In 2007, the pound-US dollar exchange rate reached as high as $2.11.

The strongest the pound has ever been against the US dollar was in 1972 when it $2.64.

What does a falling pound mean for the economy?
A falling pound could also push up the price of goods and services, which in turn could increase inflation rates.

This is because the if the value of the pound drops, it makes it more expensive for retailers and manufacturers to import food, goods and materials.

Energy bills are one of the things that are likely to increase as the pound falls, as the price of all of the gas that the UK uses is based on the dollar.

Last week, the AA also warned that the pound is affecting petrol prices – costing drivers £5 a tank.

Luke Bosdet, the AA’s fuel price spokesman, said: “The influence of the exchange rate is often overlooked when drivers compare oil price movements with those at the pump.

“At the moment, it is critical. Oil and fuel on commodity markets are traded in dollars, which makes the weaker pound very bad news for motorists.”

Paul Davies, chief executive at Carlsberg Marston’s Brewing Company, suggested the fall of the pound may cause a rise in beer prices for UK customers.

He told BBC Radio 4’s Today programme that the drop was “worrying” for the British beer industry, which imports beer and hops from overseas.

On the flip side, a weaker pound means it is cheaper for foreign companies to buy UK goods – and it is cheaper for tourists to visit the UK.

This could spell good news for retailers, as well as as restaurants and leisure attractions.

A weaker pound also makes the UK an attractive place for international investment, particularly from the US.

Why is the pound falling?
Market analysts have said the currency has “taken a hammering” off the back of Chancellor Kwasi Kwarteng announcing huge tax cuts as part of his Mini-Budget last week.

Rabobank’s Jane Foley said traders have cast some doubt over the spending plans.

She said: “They’re worried that some of these tax cuts that have been announced aren’t going to be fully funded.

“That will result in a large amount of debt at a time when the Bank of England is going to be selling some of its holdings of UK government debt.”

The pound has also been under pressure after the Bank of England admitted the UK is already likely to be in recession.

This is combined with concerns over soaring inflation rates – which are currently at a 40-year-high of 9.9%.

Meanwhile, the US dollar has been rallying in recent weeks.

The dollar tends to strengthen whenever the global economy weakens, while it has also received a boost after the Federal Reserve hiked its benchmark interest rate.

The Fed last week raised interest rates by 0.75 percentage points – compared to the Bank of England upping the UK base rate by 0.5 percentage points.

How does the pound compare to other currencies?
The strength of the US dollar is also battering other global currencies.

The euro dropped to its lowest level in 20 years against the US dollar on Friday, falling to $0.97 for the first time since 2002.

The yen has lost about one-fifth of its value against the dollar this year, while the Canadian dollar slid to a two-year low last week.

But the Russian Ruble has gained against the US dollar, climbing 4.5% last week as it hit 56.7.

Will the pound keep falling?
Of course, it is impossible to know for sure how the pound will fare over the next few months.

Exchange rates are notoriously volatile – but it is possible that Sterling could fall further, especially given the UK is feared to already be in recession.

Philip Dragoumis, owner of London-based wealth manager, Thera Wealth Management, told IFA Magazine: “If foreign investors lose confidence in the country, its Government and economy, which is happening at scale, Sterling could fall much further and the fallout will be devastating.

“This will keep inflation higher for longer and growth lower.

“So far this year, Sterling has primarily fallen against the Dollar and this is because the greenback has been strong against all currencies.“