In the mid-1980s, I came across an invitation to a “parity party” hosted by Citibank, anticipating the day when one dollar would equal one pound. That party never took place.
More recently, sterling again neared parity, hitting $1.10 in October 2022, the day before Prime Minister Liz Truss resigned.
This highlights the deep link between currencies and politics. Exchange rates respond to many factors: relative growth, interest rates, government borrowing, and confidence in political leadership. These forces are often connected. Stronger growth can spur inflation, pushing interest rates higher. Rising spending may force governments to issue more debt, raising borrowing costs and increasing pressure to grow the economy and boost tax revenues.
Currency movements also influence investment behaviour. Over the past decade, global equity funds have outperformed for UK-based investors, not only because high-growth sectors like technology are concentrated overseas, but also because a weakening pound amplified returns when converted back to sterling.
For context: a pound bought around $2 during the 2008 financial crisis. Until recently, it was worth just $1.20.
