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

Historically, the British pound (GBP) has been stronger than most currencies, including the U.S. dollar. In 2007, the value of the GBP hit a record doubling the value of the U.S. dollar. As of 2024, the British pound is the fourth strongest currency in the world, maintaining a steady value of over 1.20 USD.

The value of the British pound is explained by a combination of factors, like interest rates, inflation, and the overall state of the economy. The strength of the GDP is driven mainly by the fact that the Bank of England, which issues the currency, has played an active role in international economic developments.

However, in recent years and especially since Brexit, the GBP has weakened due to higher interest rates and fear of a recession, while the U.S. dollar has strengthened.

A Brief History of the U.K. Pound (GBP) vs. the U.S. Dollar (USD)

Before World War II, and arguably before World War I, the British pound (GBP) was the primary medium of foreign exchange, giving it a nominal premium over other currencies including the U.S. dollar (USD), with a pound (£1) fetching $5 and more. After WWII, however, the USD began its rise to become the preeminent currency in international trade and a global store of value.

For example, as of the end of 2022, the USD comprised 58% of global foreign exchange holdings. Starting from those lofty valuations, the USD began to supplant the GBP, leading to a long slide in the GBP/USD rate over the succeeding decades.

The British pound (aka the sterling) has been nominally stronger than the USD for most of the past few decades, making a high of just over 2.00 USD per GBP around the time of the Great Financial Crisis (GFC) of 2007–2009. The GFC saw investors flee to the USD and out of the pound, among other major currencies. Once the GFC dust had settled, the GBP dropped to the 1.40–1.45 level. The GBP weakness was more a case of panic buying of the USD than any GBP-negative issue, as other major currencies weakened sharply against the USD as well (see long-term chart below).

In subsequent years, GBP/USD fluctuated between roughly 1.40 and 1.70, but then came Brexit in June 2016, when the United Kingdom surprisingly voted to leave the European Union (EU). The pound was knocked down virtually overnight from the 1.40–1.45 area to the 30-year low of 1.32, where it remained until recent events and market dislocations.

The culprit this time is a combination of factors, chief among them USD strength due to widening interest rate differentials in the USD’s favor. Along with higher relative interest rates, the U.S. economic outlook is reasonably positive, while market watchers are soon to declare the U.K. is in or near recession. The pound is not alone in being sold against the USD, as investors fear a global recession and favor the greenback as a safe haven in times of economic distress.

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. For more than 20 years, one U.S. dollar has been worth less than one British pound.

As of April 2024, the dollar was sitting at around 1.24 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 April 2024, $2.348 trillion U.S. dollars were in circulation. By contrast, the total pounds in circulation come to a mere £ 81 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 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. There was also a fear of the effects of what was 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 more than 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 of around 1.20. There was a slight rebound in 2018, peaking at around 1.40 in April of that year. Most recently, the sterling was trading roughly 1.2588 against the buck, owing to concerns over global growth, the risks of a U.K. recession, and interest rate differentials vastly in favor of the USD. Market speculators may very well make a test of parity (1 GBP to 1 USD) and even lower, potentially giving the USD a nominal value above the GBP.

The Bottom Line

The British pound (GBP) has enjoyed a nominal premium to the U.S. dollar (USD) for many years, owing both to historical convention and the Bank of England’s willingness to intervene in times of crisis to defend the pound. The resignation of Kwasi Kwarteng as Chancellor of the Exchequer and the subsequent collapse of the Liz Truss government seem to be acting as a stabilizing influence on the GBP. The sterling now appears to be holding steady, with the exchange rate at $1.26 USD to £1 GBP as of April 2024.