What is happening with the euro and the US dollar? Alastair Archbold of Foremost Currency looks at where are pounds will go further - or less far than 12 months ago.
Property in Eurozone 12% cheaper than a year ago
Over the last 12 months, the pound/euro exchange rate has risen to its highest in eight years, meaning big savings for those purchasing in the Eurozone.
A typical property purchase of €250,000 now costs a staggering £24,000 less that this time last year, seriously boosting the budget for buyers looking in hotspots popular with Brits, such as France, Spain, Portugal and Italy.
The reasons for the high exchange rate are two-fold. Firstly the euro has weakened significantly due to problems in southern European countries such as Greece. Their well-publicised debt problems have caused investors to sell the euro, weakening the single currency and making it cheaper to buy.
Secondly, the UK economy is performing very well, with unemployment low, inflation on the rise, and the Bank of England expected to raise interest rates in around 6 months' time. Higher interest rates tend to strengthen a currency due to the higher return on offer for investors, so sterling has been gaining against other currencies.
Moving forwards, Greece has now been granted an €86 billion bailout that should now settle the markets so we may see the euro regain strength causing rates to drop back away.
Longer term in the years to come the rate may settle around the €1.40 level, where it was before the recession, but with the Greece situation seemingly resolved, I would expect the sterling/euro currency pair to drop back away.
Many buyers are fixing the exchange rate now using a 'Forward Contract' while it is close to the best it's been in a decade, to protect against the rate getting worse and allowing effective budgeting.
Property in USA becomes 6 per cent more expensive
In contrast to sterling/Euro, the Sterling/Dollar exchange rate has been steadily dropping. In the last 12 months rates have fallen from highs of $1.66 to as low as $1.46, and currently sits at the mid-point of this range at around $1.56. The reason for the drop is that the US Economy has been posting very impressive figures for jobs and growth.
The USA is also expected to be the first major western economy to raise interest rates, potentially within the next month or two. The potential of a higher return for investors has caused the greenback (dollar) to strengthen.
Also, we have seen a drop in commodity prices such as oil, gold and other precious metals and when commodity prices fall, investors seek the perceived 'safe haven' of the US dollar.
Most commodity currencies (a name given to currencies of countries which depend heavily on the export of certain raw materials for income such as the Australian Dollar, New Zealand Dollar, Canadian Dollar and South African Rand) have weakened significantly in recent months, meaning record high exchange rates for those purchasing in these parts of the world with sterling.
The issues in Greece have also exacerbated this US dollar buying, strengthening it considerably and making it more expensive to buy.
US dollar pegged markets
It's not just properties in the USA that are becoming more expensive however; other popular winter sun holiday home destinations have their currency pegged to the US dollar too, for example Dubai, and Caribbean Islands such as the Bahamas, Barbados, and Bermuda.
Those looking to purchase here are also seeing their choice of properties being limited by their decreasing budget. Using a 'Forward contract' can help with budgeting in these situations, allowing you to lock in the rate today for up to two years, protecting you against any continuing decline in the rate of exchange.
Types of Currency Transfer
Spot Contract - Currency Right Now
The most popular way to buy currency. You fix a rate, settle within 2 days, and your currency is transferred by priority transfer to the account of your choice.
Forward Contract - Fix into the Future
You can fix today's rate of exchange for up to 2 years, protecting you against volatility and helping you to budget. You lodge 10% of the total to be converted within 2 days, with the remaining balance due when you want your currency transferred.
Limit order - Hold out for a better rate
Secure your currency when your desired rate becomes available; particularly useful if time is on your side and you think the rate may get better.
Stop loss order - Protect against rates dropping
Your currency is exchanged if the rate goes below a pre-determined level. Combined with a limit order, you can hold out for a better rate while protecting yourself from a sudden fall in the market.
