<p>There's nothing wrong with \$1=£1.</p>
<p>Unless it was \$1.50=£1 last week - <em>then</em> it's a <em>big</em> problem - for the people who have £, at least! The people who have \$ will be glad they can buy things from the UK for less money.</p>
<p>Consider that your bank account is measured in dollars, because things you buy overseas are usually priced in dollars. Your bank account now has 30% less dollars than it did last month. Your paycheque has 30% less dollars than it did last month. Are you happy about that?</p>
<p>The only reason \$1=£1 is a bad sign, is that normally it's closer to \$1.50=£1. If it's \$1=£1 now, that means about 33% of the UK economy went up in smoke.</p>
<p>In contrast, since the &quot;normal&quot; level of ¥ is about \$1=¥100, if it was suddenly \$1=¥1 that would be extremely good for people who had ¥, and people who had $ would be annoyed they couldn't buy things from Japan any more. There's nothing actually special about the number 1 - it's just an easy number to fixate on, and drastically different from &quot;normal&quot;</p>

CC BY-SA 4.0
2022-09-28T17:50:40.817Z
I'm not sure what you mean by "went up in smoke".  It would improve your answer if you could use a more orthodox economic term or phrase.
Adam Bailey
CC BY-SA 4.0
2022-09-28T17:58:52.763Z
This helps, thanks. So from this I gather that there is no intrinsic issue with $1 = £1 but rather if the value dropped markedly from say £1.20 to £1.01, this would be a significant relative decline, betokening broader economic upset, such as loss of trader confidence in the British economy. This is in fact what we are currently seeing in the UK, as we have the Chancellor pushing through unnecessary tax cuts whilst increasing public debt (to keep consumer energy prices static) and at the same time the Bank of England raising interest rates yet further to address the highest inflation in G7.
thomasbishop
CC BY-SA 4.0
2022-09-28T18:44:42.843Z
@thomasbishop To put blame on Chancellor seems disingenuous, as the euro seems to be mimicking GBP decline.
paulj
CC BY-SA 4.0
2022-09-28T19:36:12.417Z
@paulj I've tried hard to avoid making political points. I have my own opinions but in this forum I am trying to understand the economic rationale for current events. I'm not putting the blame on him, I merely point out that clearly something has gone very wrong, very suddenly. Even right of centre publications (FT, Economist) etc are highlighting basic errors in his management.
thomasbishop
CC BY-SA 4.0
2022-09-28T21:48:35.307Z
"Consider that your bank account is measured in dollars, because things you buy overseas are usually priced in dollars." Do you mean to consider how your bank account (denominated in GBP) would convert to Dollars? Or to consider a bank account that was actually denominated in Dollars? An account actually denominated in Dollars would be unchanged against the Dollar and have risen significantly in value against the GBP, no?
reirab
CC BY-SA 4.0
2022-09-28T21:55:42.237Z
@thomasbishop Yes, that's correct that it's the decline that's the issue, not the specific 1:1 exchange rate. Frankly, it's even worse than it sounds as the Dollar has lost quite a lot of value, too. That's what happens when production drops significantly (i.e. due to shutdowns) while the money supply is increased dramatically (i.e. due to high government spending, "quantitative easing", artificially low interest rates, etc.) Currency is just an abstract representation of the goods and services in the economy, so its value is roughly (value of goods and services in economy / money supply.)
reirab
CC BY-SA 4.0
2022-09-29T04:08:29.513Z
"The people who have `$` will be glad they can buy things from the UK for less money." In the short term, yes. In somewhat longer term, the people who have `$` will be sad that the UK no longer wants to trade with them, and that the reduced supply/number of competitors for goods pushes prices up again.
Karl Knechtel
CC BY-SA 4.0
2022-09-29T06:53:43.803Z
@paulj over the last week GBP has moved against EUR with a very similar profile to how it has moved against USD. The current turmoil started immediately after Kwarteng's move. But somehow it's not to do with that?!
AakashM
CC BY-SA 4.0
2022-09-29T17:04:00.017Z
@user253751 No political intention there. I was talking about what has been affecting production in the U.S. and, thus, the Dollar. The invasion of Ukraine had almost no impact on that in the U.S. and, while worker sickness has certainly been higher than usual, it's nowhere near the level of difference caused by shutdowns (both here and in places we import stuff from.) Dramatically reduced supply from East Asia has been especially impactful on inflation in the U.S. While Europe imports a lot of fuel from Russia, the U.S. does not. We have lots of it in North America already.
reirab
CC BY-SA 4.0
2022-09-29T17:09:49.980Z
@user253751 An additional large issue (that was indeed more politically driven) in the U.S. was how the unemployment was handled. The federal government kept extending unemployment supplements long after they should have, even after we already had a labor shortage in progress. Paying people to not work during a labor shortage obviously doesn't help in productivity.
reirab
CC BY-SA 4.0
2022-09-29T17:46:01.380Z
@user253751 No, unemployment benefits went to people who are unemployed. There were separate benefits for business owners to pay employees that they kept during the actual shutdowns, but the unemployment benefit supplements continued on long after the shutdowns were over, even after the labor shortage had already started. The supplements were certainly understandable (even if poorly designed) during the shutdowns, but they were continued far too long afterwards.
reirab
CC BY-SA 4.0
2022-09-30T12:35:10.880Z
I am surprised this mediocre answer has so many upvotes. Parity with the dollar is clearly a very import psychological threshold, even if a exchange rate of 1.015 is not fundamentally different and affects markets even if fundamentals should be unaffected.
BrsG
CC BY-SA 4.0
2022-09-28T17:11:30.317Z
2022-09-28T17:38:29.583Z
2022-09-28T17:38:29.583Z
Criticize SE actions means ban
<p>Not really my topic, but I agree with the sentiment of the question. I have also always been puzzled by the finance media's focus on exchange rate movements. On the one hand, the country becomes &quot;poorer&quot; on the world market as it can buy less imports for their income. On the other hand, it becomes more competitive as their exports become cheaper on the world market. Which factor dominates for &quot;the economy&quot; seems unclear to me ex-ante (although one might approximate it depending on how much a country imports). Besides the &quot;effect&quot;, I think another reason why media care about exchange rates is that they are a signal of the state of the economy, in that investors decided to move funds out of the UK currency for some reason..</p>

CC BY-SA 4.0
2022-09-28T18:38:59.690Z
@user253751 Incorrect. As can be see from the decimation of manufacturing in the US.
paulj
CC BY-SA 4.0
2022-09-28T19:13:31.257Z
Almost everyone buys imported goods all the time, from food and clothing to tech gadgets and cars. Most people do not export goods. So I expect that the disadvantages of currency losing relative value are felt much more directly by the general population than the advantages.
Marc
CC BY-SA 4.0
2022-09-28T19:38:41.457Z
I don't feel this response is relevant to my original question. I wasn't asking why, in your assertion,the media fixates upon currency fluctuation. I was asking specifically why dollar-parity or lack thereof is a cause for general economic concern.
thomasbishop
CC BY-SA 4.0
2022-09-28T19:43:02.020Z
@user253751 it's the economic reality of "supply and demand".  If a computer built in England costs $300, while one built in China costs $200 *most* (the *vast* majority) of people will buy the Chinese computer, and you know it.
RonJohn
CC BY-SA 4.0
2022-09-28T21:16:45.533Z
@thomasbishop well my answer was that it is not a big deal (if not for the symbolic value) if the Sterling would fall significantly.
Papayapap
CC BY-SA 4.0
2022-09-28T21:18:43.623Z
@Marc In the short-run maybe, but medium-term you also need to consider the income side which depends on jobs which depeds on competitiveness
Papayapap
CC BY-SA 4.0
2022-09-28T21:24:53.167Z
Ironically, China has purposefully undervaluing their currency for a long time with the West complaining this to be unfair. An overvalued currency is maybe more problematic than and undervalued one.
Papayapap
CC BY-SA 4.0
2022-09-28T21:59:30.217Z
@Papayapap Something that is bad in the short-run and neutral in the medium-term is still a bad thing, right?
Marc
CC BY-SA 4.0
2022-09-29T04:09:56.683Z
@RonJohn BTW, dollar signs in comments apparently need to be escaped.
Karl Knechtel
CC BY-SA 4.0
2022-09-29T12:50:26.360Z
@paulj What did they say that is incorrect, and how is it incorrect? Simply saying "they terk our manufacturing jerbs" is not a valid argument, and the fact that you not only think it is a valid argument, but think that the argument is so obvious that you don't even have to explain what the argument is, strongly implies that you're an ideologue who doesn't understand economics.
Acccumulation
CC BY-SA 4.0
2022-09-30T02:44:56.507Z
@KarlKnechtel - I hate that. How do you 'escape' something?
Mazura
CC BY-SA 4.0
2022-09-28T09:24:48.480Z
2022-09-28T12:41:43.377Z
2022-09-28T12:41:43.377Z
Papayapap
<p>A falling pound means imports will cost more.  Some imports are necessary - you cannot avoid buying them - so a falling pound will make inflation worse.
Additionally, if the pound is falling, you will have to offer higher interest in order to finance your debt, making the government eventually have to raise the money to pay the interest, possibly by raising taxes.  In response to higher government bond prices, companies that wish to issue debt would have to pay a higher interest rate to make bond buyers want to buy them when they can buy an (almost) risk free government bond.  That makes life harder for the companies: the higher interest payments will eat into their profits.<br />
This is on top of the central bank trying to contain inflation by raising interest rates.
Rising interest rates hurt people and companies that have any debt that has interest rate that floats (most UK house mortgages are like that.)</p>
<p>I think some real economists could answer this better than I.</p>

CC BY-SA 4.0
2022-09-29T19:09:07.460Z
Welcome to the site.  You make some valid points, but if you are saying that higher interest rates lead to higher government bond prices, that is not correct.  In fact they lead to lower bond prices - see [here](https://www.ftadviser.com/investments/2022/09/01/how-interest-rates-affect-bond-prices/#:~:text=%22Higher%20interest%20rates%20make%20the,it%20a%20more%20competitive%20investment.%22).
Adam Bailey
CC BY-SA 4.0
2022-09-30T12:24:18.553Z
It's also incorrect that the majority of UK mortgages have a floating rate. The reverse is true, the majority has a fixed rate for the initial 2-5 years.
BrsG
CC BY-SA 4.0
2022-09-30T20:18:26.353Z
@ Adam.  No I'm not saying the price of the bond increases but the cost to the government of serving the bond (paying the interest) increases.
JustWilliam
CC BY-SA 4.0
2022-09-30T20:23:17.313Z
@BrsG You're correct.  In UK they used to be majority floating, but now 75% are fixed for 2 - 5 years then the borrower has to pay the lenders new rate which will have gone up or re-finance at a new rate which will also have gone up - so higher rates do adversely affect current borrowers, but perhaps not immediately but when they come to the end of the fixed part of the loan.
JustWilliam
CC BY-SA 4.0
2022-09-30T21:20:21.847Z
@Flynn  In that case perhaps you could edit your answer accordingly, eg to replace "hgher government bond prices" by "higher government bond rates".
Adam Bailey
CC BY-SA 4.0
2022-10-01T18:57:23.903Z
I agree with Adam Bailey. Altogether your rationale is correct, but "government bond prices" is an inaccurate term that does not even match the costs *to the government*.
Iñaki Viggers
CC BY-SA 4.0
2022-09-29T18:04:59.960Z
2022-09-29T18:04:59.960Z
JustWilliam
<p>There is nothing unique regarding GBP vs Dollar. The euro is behaving in the same manner.</p>
<p>&quot;While the declining domestic buying power of a dollar dominates headlines in the United States, American inflation is having a surprising impact around the globe: Nearly <strong>every</strong> major currency has fallen dramatically against the dollar over the past six months. &quot; - coin desk ,  David Z. Morris</p>

CC BY-SA 4.0
2022-09-30T12:18:05.960Z
2022-09-30T12:18:05.960Z
paulj
<p>Please forgive the probable naivety of this question. I am not an economics student I am just trying to understand the currency fluctuations that are currently occurring with GBP as a result of our new chancellor's likely incompetence.</p>
<p>In nearly all the coverage, journalists and economists refer to the &quot;risk&quot; of sterling dropping to dollar parity, or worse, dropping below the dollar. I can understand the latter but why would the pound being equal to the value of the dollar be bad? Why is it a sign of health for the pound to be worth more than the dollar? Dollar parity being bad is presented as a self-evident truth by the media and no one bothers to explain it.</p>
<p>I understand the dollar is the global currency post the abandonment of the gold standard and that advanced economies use floating exchange rates rather than fixed rates relative to the dollar but why must they float 'above', surely the US economy is relatively strong globally so why would it be bad for monetary value to be equal to that?</p>
<p>If we were back to gold and $36 was equal to one ounce of gold or whatever, then surely parity would imply that inflation was flat/negligible and low inflation in popular discussions of economics/political economy is usually presented as a good thing.</p>

CC BY-SA 4.0
2022-09-30T03:32:38.567Z
Americans are *the Joneses*; if it's any less than the Dollar, then they're not *keeping up*. Nothing to do with *value*. It's *status*.
Mazura
CC BY-SA 4.0
2022-09-30T03:40:40.347Z
It's just tradition - the pound has *always* been worth more than the dollar.  Hitting that threshold where it's *equal* to the dollar means something is seriously out of whack.
Mark Ransom
CC BY-SA 4.0
2022-09-30T12:25:33.417Z
It's entirely meaningless: an idea pushed by journalists with very little understanding of exchange rates and all that. The same sort of nonsense comes up when the euro-dollar exchange rate crosses unity.
PatrickT
<monetary-policy><currency><international-economics><uk>
Can someone explain why sterling-dollar parity is bad?
thomasbishop
# Can someone explain why sterling-dollar parity is bad?

(Asked by: username_0 on 2022-09-28)

Please forgive the probable naivety of this question. I am not an economics student I am just trying to understand the currency fluctuations that are currently occurring with GBP as a result of our new chancellor's likely incompetence.

In nearly all the coverage, journalists and economists refer to the "risk" of sterling dropping to dollar parity, or worse, dropping below the dollar. I can understand the latter but why would the pound being equal to the value of the dollar be bad? Why is it a sign of health for the pound to be worth more than the dollar? Dollar parity being bad is presented as a self-evident truth by the media and no one bothers to explain it.

I understand the dollar is the global currency post the abandonment of the gold standard and that advanced economies use floating exchange rates rather than fixed rates relative to the dollar but why must they float 'above', surely the US economy is relatively strong globally so why would it be bad for monetary value to be equal to that?

If we were back to gold and $36 was equal to one ounce of gold or whatever, then surely parity would imply that inflation was flat/negligible and low inflation in popular discussions of economics/political economy is usually presented as a good thing.

**Tags:** monetary-policy, currency, international-economics, uk
> **Comments:**
> **username_1**: Americans are *the Joneses*; if it's any less than the Dollar, then they're not *keeping up*. Nothing to do with *value*. It's *status*.  
> **username_2**: It's just tradition - the pound has *always* been worth more than the dollar.  Hitting that threshold where it's *equal* to the dollar means something is seriously out of whack.  
> **username_3**: It's entirely meaningless: an idea pushed by journalists with very little understanding of exchange rates and all that. The same sort of nonsense comes up when the euro-dollar exchange rate crosses unity.  

---

## 4 answers

### Answer by username_4 on 2022-09-28. Score: 26

There's nothing wrong with \$1=£1.

Unless it was \$1.50=£1 last week - *then* it's a *big* problem - for the people who have £, at least! The people who have \$ will be glad they can buy things from the UK for less money.

Consider that your bank account is measured in dollars, because things you buy overseas are usually priced in dollars. Your bank account now has 30% less dollars than it did last month. Your paycheque has 30% less dollars than it did last month. Are you happy about that?

The only reason \$1=£1 is a bad sign, is that normally it's closer to \$1.50=£1. If it's \$1=£1 now, that means about 33% of the UK economy went up in smoke.

In contrast, since the "normal" level of ¥ is about \$1=¥100, if it was suddenly \$1=¥1 that would be extremely good for people who had ¥, and people who had $ would be annoyed they couldn't buy things from Japan any more. There's nothing actually special about the number 1 - it's just an easy number to fixate on, and drastically different from "normal"

> **Comments:**
> **username_5**: I'm not sure what you mean by "went up in smoke".  It would improve your answer if you could use a more orthodox economic term or phrase.  
> **username_0**: This helps, thanks. So from this I gather that there is no intrinsic issue with $1 = £1 but rather if the value dropped markedly from say £1.20 to £1.01, this would be a significant relative decline, betokening broader economic upset, such as loss of trader confidence in the British economy. This is in fact what we are currently seeing in the UK, as we have the Chancellor pushing through unnecessary tax cuts whilst increasing public debt (to keep consumer energy prices static) and at the same time the Bank of England raising interest rates yet further to address the highest inflation in G7.  
> **username_6**: @thomasbishop To put blame on Chancellor seems disingenuous, as the euro seems to be mimicking GBP decline.  
> **username_0**: @paulj I've tried hard to avoid making political points. I have my own opinions but in this forum I am trying to understand the economic rationale for current events. I'm not putting the blame on him, I merely point out that clearly something has gone very wrong, very suddenly. Even right of centre publications (FT, Economist) etc are highlighting basic errors in his management.  
> **username_7**: "Consider that your bank account is measured in dollars, because things you buy overseas are usually priced in dollars." Do you mean to consider how your bank account (denominated in GBP) would convert to Dollars? Or to consider a bank account that was actually denominated in Dollars? An account actually denominated in Dollars would be unchanged against the Dollar and have risen significantly in value against the GBP, no?  
> **username_7**: @thomasbishop Yes, that's correct that it's the decline that's the issue, not the specific 1:1 exchange rate. Frankly, it's even worse than it sounds as the Dollar has lost quite a lot of value, too. That's what happens when production drops significantly (i.e. due to shutdowns) while the money supply is increased dramatically (i.e. due to high government spending, "quantitative easing", artificially low interest rates, etc.) Currency is just an abstract representation of the goods and services in the economy, so its value is roughly (value of goods and services in economy / money supply.)  
> **username_8**: "The people who have `$` will be glad they can buy things from the UK for less money." In the short term, yes. In somewhat longer term, the people who have `$` will be sad that the UK no longer wants to trade with them, and that the reduced supply/number of competitors for goods pushes prices up again.  
> **username_9**: @paulj over the last week GBP has moved against EUR with a very similar profile to how it has moved against USD. The current turmoil started immediately after Kwarteng's move. But somehow it's not to do with that?!  
> **username_7**: @user253751 No political intention there. I was talking about what has been affecting production in the U.S. and, thus, the Dollar. The invasion of Ukraine had almost no impact on that in the U.S. and, while worker sickness has certainly been higher than usual, it's nowhere near the level of difference caused by shutdowns (both here and in places we import stuff from.) Dramatically reduced supply from East Asia has been especially impactful on inflation in the U.S. While Europe imports a lot of fuel from Russia, the U.S. does not. We have lots of it in North America already.  
> **username_7**: @user253751 An additional large issue (that was indeed more politically driven) in the U.S. was how the unemployment was handled. The federal government kept extending unemployment supplements long after they should have, even after we already had a labor shortage in progress. Paying people to not work during a labor shortage obviously doesn't help in productivity.  
> **username_7**: @user253751 No, unemployment benefits went to people who are unemployed. There were separate benefits for business owners to pay employees that they kept during the actual shutdowns, but the unemployment benefit supplements continued on long after the shutdowns were over, even after the labor shortage had already started. The supplements were certainly understandable (even if poorly designed) during the shutdowns, but they were continued far too long afterwards.  
> **username_10**: I am surprised this mediocre answer has so many upvotes. Parity with the dollar is clearly a very import psychological threshold, even if a exchange rate of 1.015 is not fundamentally different and affects markets even if fundamentals should be unaffected.  

---

### Answer by username_11 on 2022-09-28. Score: 4

Not really my topic, but I agree with the sentiment of the question. I have also always been puzzled by the finance media's focus on exchange rate movements. On the one hand, the country becomes "poorer" on the world market as it can buy less imports for their income. On the other hand, it becomes more competitive as their exports become cheaper on the world market. Which factor dominates for "the economy" seems unclear to me ex-ante (although one might approximate it depending on how much a country imports). Besides the "effect", I think another reason why media care about exchange rates is that they are a signal of the state of the economy, in that investors decided to move funds out of the UK currency for some reason..

> **Comments:**
> **username_6**: @user253751 Incorrect. As can be see from the decimation of manufacturing in the US.  
> **username_12**: Almost everyone buys imported goods all the time, from food and clothing to tech gadgets and cars. Most people do not export goods. So I expect that the disadvantages of currency losing relative value are felt much more directly by the general population than the advantages.  
> **username_0**: I don't feel this response is relevant to my original question. I wasn't asking why, in your assertion,the media fixates upon currency fluctuation. I was asking specifically why dollar-parity or lack thereof is a cause for general economic concern.  
> **username_13**: @user253751 it's the economic reality of "supply and demand".  If a computer built in England costs $300, while one built in China costs $200 *most* (the *vast* majority) of people will buy the Chinese computer, and you know it.  
> **username_11**: @thomasbishop well my answer was that it is not a big deal (if not for the symbolic value) if the Sterling would fall significantly.  
> **username_11**: @Marc In the short-run maybe, but medium-term you also need to consider the income side which depends on jobs which depeds on competitiveness  
> **username_11**: Ironically, China has purposefully undervaluing their currency for a long time with the West complaining this to be unfair. An overvalued currency is maybe more problematic than and undervalued one.  
> **username_12**: @Papayapap Something that is bad in the short-run and neutral in the medium-term is still a bad thing, right?  
> **username_8**: @RonJohn BTW, dollar signs in comments apparently need to be escaped.  
> **username_14**: @paulj What did they say that is incorrect, and how is it incorrect? Simply saying "they terk our manufacturing jerbs" is not a valid argument, and the fact that you not only think it is a valid argument, but think that the argument is so obvious that you don't even have to explain what the argument is, strongly implies that you're an ideologue who doesn't understand economics.  
> **username_1**: @KarlKnechtel - I hate that. How do you 'escape' something?  

---

### Answer by username_15 on 2022-09-29. Score: -1

A falling pound means imports will cost more. Some imports are necessary - you cannot avoid buying them - so a falling pound will make inflation worse.
Additionally, if the pound is falling, you will have to offer higher interest in order to finance your debt, making the government eventually have to raise the money to pay the interest, possibly by raising taxes. In response to higher government bond prices, companies that wish to issue debt would have to pay a higher interest rate to make bond buyers want to buy them when they can buy an (almost) risk free government bond. That makes life harder for the companies: the higher interest payments will eat into their profits.  
This is on top of the central bank trying to contain inflation by raising interest rates.
Rising interest rates hurt people and companies that have any debt that has interest rate that floats (most UK house mortgages are like that.)

I think some real economists could answer this better than I.

> **Comments:**
> **username_5**: Welcome to the site.  You make some valid points, but if you are saying that higher interest rates lead to higher government bond prices, that is not correct.  In fact they lead to lower bond prices - see [here](https://www.ftadviser.com/investments/2022/09/01/how-interest-rates-affect-bond-prices/#:~:text=%22Higher%20interest%20rates%20make%20the,it%20a%20more%20competitive%20investment.%22).  
> **username_10**: It's also incorrect that the majority of UK mortgages have a floating rate. The reverse is true, the majority has a fixed rate for the initial 2-5 years.  
> **username_15**: @ Adam.  No I'm not saying the price of the bond increases but the cost to the government of serving the bond (paying the interest) increases.  
> **username_15**: @BrsG You're correct.  In UK they used to be majority floating, but now 75% are fixed for 2 - 5 years then the borrower has to pay the lenders new rate which will have gone up or re-finance at a new rate which will also have gone up - so higher rates do adversely affect current borrowers, but perhaps not immediately but when they come to the end of the fixed part of the loan.  
> **username_5**: @Flynn  In that case perhaps you could edit your answer accordingly, eg to replace "hgher government bond prices" by "higher government bond rates".  
> **username_16**: I agree with Adam Bailey. Altogether your rationale is correct, but "government bond prices" is an inaccurate term that does not even match the costs *to the government*.  

---

### Answer by username_6 on 2022-09-30. Score: -2

There is nothing unique regarding GBP vs Dollar. The euro is behaving in the same manner.

"While the declining domestic buying power of a dollar dominates headlines in the United States, American inflation is having a surprising impact around the globe: Nearly **every** major currency has fallen dramatically against the dollar over the past six months. " - coin desk , David Z. Morris


---

