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How a strong pound affects foreign currency exchange rates

GuidesHow a strong pound affects foreign currency exchange rates

The UK commands a third of all money transfers made on the foreign exchange, with the US a close second. Traditionally, the pound and US dollar are seen as two of the most highly valued currencies in the world.

The sheer volume of transfers taking place on the foreign exchange means there are daily fluctuations in the currency exchange rate even when the economic climate is stable. This is because pound sterling is freely bought and sold on the foreign exchange across the world. When traders are buying pounds, the value of the pound rises and it is strong. When traders sell, the value drops and it becomes weaker. 

This constant trading back and forth leads to fluctuations in the day-to-day currency exchange rate, but looking at the overall performance of the pound, it is quite a strong base currency. People assume a strong pound puts British businesses in a strong position, but a good currency exchange rate can actually work against those exporting goods.  British manufacturers have often suffered from a strong pound.

For example, if you are a UK company exporting manufactured goods to America at a unit cost of £100 each, then a strong pound will see the product become more expensive in terms of US dollars, even though its UK price remains the same.

By using independent foreign currency brokers like us at Pure FX in preference to banks, fluctuations in currency values can be coped with, allowing companies to trade abroad without incurring heavy losses.

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