Pound hits $2 level for first time in 15 years

With the pound valued at $2, a level it last reached in 1992, Clerical Medical examines the historic performance of the exchange rate and the potential impact of the weaker US dollar.

Benefits of the strength of the pound against the dollar include lower costs of imported goods and cheaper holidays to the United States. Conversely, it could also mean that manufacturers will have more difficulty exporting goods to the US, as the price of UK goods will be higher.

History of the Pound-Dollar Exchange Rate

At $2, the pound is currently about 20% above its 20-year average of $1.65. It last hit $2 in 1992, but only for a short time. The last time the pound traded consistently above $2 was in 1975.

Between World War II and 1985, the pound suffered periodic devaluations, falling in value from $4.20 in 1945 to $1.10 by 1985.

In 1985, politicians and central bankers in the New York Plaza Agreement agreed that the pound was undervalued, as it had fallen to a level of $1.10, down from $4.20 in 1945.

Efforts were made to manage exchange rates better, culminating in the pound joining the Exchange Rate Mechanism (ERM) in 1990. This meant that the pound traded at a fixed exchange rate to other European currencies including the German Deutsche Mark. It also meant that the exchange rate between pounds and dollars was mainly determined by the exchange rate between deutsche marks and dollars.

The last time the pound hit $2 was on 8th September 1992, thanks to its link to the Deutsche Mark. Germany was enjoying a post-1990 unification boom, while the UK was suffering a recession.

Eight days later, on Black Wednesday, heavy selling of the pound for foreign currencies resulted in the value of the pound falling against both the US dollar and European currencies. The link between the pound and European currencies was broken and the pound was forced out of the ERM. By Christmas 1992, the pound had fallen in value to $1.50.

Why is the Pound-Dollar relationship so important?

The US is the biggest market for British exports, (worth £54 billion) and the third largest supplier of imports to the UK (worth £37 billion).


The US is the largest foreigner investor in the UK (with investments worth £925 billion) and the most popular destination for Britons to invest (with investments worth £890 billion).

The US is the UK's third most popular travel destination, with 4.2 million annual trips.

London is the most important financial centre for foreign exchange trading, while New York is the most important financial centre for other financial transactions.

Most commodities, such as oil, metals and agricultural products, are traded in US dollars.

Martin Ellis, chief economist, said: "The pound is currently at a 15-year high against the dollar, which is good news for importers and those planning a shopping spree in the US. However for those companies dependent on exporting to the States, the pound's strength will be a hindrance as it means their goods are more expensive."