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The US dollar (USD) is the most frequently-traded global currency, and the British pound sterling (GBP) is the fourth most traded unit. Together, the GBP and USD were involved in nearly one-half of global foreign exchange transfers in 2013, according to the most recent data from the Bank for International Settlements. Both currencies are anchors of the world economy; the GBP served as the global reserve currency prior to WWI, only to be replaced by the USD in the post-war period, which continues to be the dominant currency today.
The American and British governments both employ floating exchange rate agreements, under which the value of each currency is set by free-market supply and demand. Both governments allow for unrestricted international capital flows, which has helped to encourage significant cross-border money transfers from the UK to the US.
The GBP to USD exchange rate has fluctuated considerably since both countries liberalised their foreign exchange policies in the late 1970s. The pound’s value plummeted in the early 1980s once the government abandoned policies aimed at keeping the pound’s value higher than its market value. The GBP hit a low of US$1.09 in February 1985, the closest that the two currencies have ever come to parity. The pound quickly recovered from this point, however, helped along by efforts under the Plaza Accord to lower the USD’s value against all major currencies between 1985-1987.
In the late 1980s, the UK government adopted an informal currency peg to the stronger German Deutschmark, which helped to boost the pound’s value against the dollar over the course of 1990. In October 1990, the UK agreed to sign on to the European Exchange Rate Mechanism (ERM), the predecessor to the EU monetary union. Under the ERM, the government was required to intervene to keep the value of the pound within 6% of other member currencies at all times - the goal being to pave the way for a common currency.
The pound spiked to US$1.964 between November 1991 and February 1992, but the government was unable to support the pound’s value at this high of a rate. The management arrangement fell apart under the weight of speculative attacks; rapid depreciation of the USD also hit UK export revenue hard, as many UK exports were USD-denominated. The UK exited the ERM in September 1992, and these factors combined to push the pound back to US$1.55 by that December.
After this time, both countries have largely allowed their currencies to float freely on the market. From 1994 until mid-2000, the GBP to USD exchange rate varied more modestly between US$1.50 and US$1.70. The GBP then dipped below the US$1.50 mark in much of 2001-2002, but shot up over the next two years to reach US$1.929 in December 2004.
The Bank of England raised interest rates in late 2006 and early 2007 in an effort to curb rising inflation. This led the pound to appreciate further against all major currencies, including the USD, jumping from US$1.89 in August 2006 to a 20-year peak of US$2.07 in November 2007. The pound’s value held steady in the initial months of the subprime mortgage crisis, as analysts initially thought its effects might be contained to the United States. As the economic downturn spread to financial centres in the UK and Europe, however, the pound lost almost 29% of its value against the USD, falling from US$1.988 in July 2008 to US$1.417 in March 2009, eight months later.
Since the beginnings of economic recovery in 2010, the GBP to USD exchange rate has largely stabilised, fluctuating again between US$1.50 and US$1.70. The UK has shown a much stronger economic performance in recent months than EU member countries; despite low inflation in Great Britain, the government reported strong wage growth and lower unemployment rates in the fourth quarter of 2014, which helped to strengthen the GBP against several currencies, including the euro, going into the new year.
However, a surge in the USD supported by higher gas production, lower oil prices, and improving employment numbers in the United States has overpowered the GBP. The pound lost over 11% of its value in the six months from July 2014 (US$1.706) to January 2015 (US$1.514).
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