Will the pound gain value over the dollar in August 2011?
July 27, 2011 11:38 AM Subscribe
FinanceFilter: Getting paid in British pounds converted to US dollars -- should I take it now, or hold off in hopes that the pound gains value over the dollar because of the debt ceiling situation, etc.?
I am getting paid a decently-large amount of money for a job I did by a British company. The amount is fixed in British pounds sterling, which will be converted to dollars at the going exchange rate.
The situation is somewhat unique and I can hold off and be paid in a month or so. Is the pound expected to gain value over the dollar because of the debt ceiling situation? Or should I just take the money now?
Asking anonymously because, in the unlikely event my client finds this, it may appear untoward.
I am getting paid a decently-large amount of money for a job I did by a British company. The amount is fixed in British pounds sterling, which will be converted to dollars at the going exchange rate.
The situation is somewhat unique and I can hold off and be paid in a month or so. Is the pound expected to gain value over the dollar because of the debt ceiling situation? Or should I just take the money now?
Asking anonymously because, in the unlikely event my client finds this, it may appear untoward.
Neither Obama nor Boehner would be unable to answer this question definitively. I can tell you I'd always rather take money now than later.
posted by 2bucksplus at 11:57 AM on July 27, 2011
posted by 2bucksplus at 11:57 AM on July 27, 2011
EDIT: Neither Obama nor Boehner would be able to answer this question definitively. I can tell you I'd always rather take money now than later.
posted by 2bucksplus at 11:58 AM on July 27, 2011
posted by 2bucksplus at 11:58 AM on July 27, 2011
There is no way to answer this due to market variables, etc. - however the US dollar has been weak for the past few years due to emerging markets and the global recession. However, the British pound is holding pretty steady around 1.64 USD. I would go for the exchange now because who knows what is going to happen if the US defaults:
http://www.x-rates.com/d/USD/GBP/graph120.html
posted by lpcxa0 at 12:09 PM on July 27, 2011
http://www.x-rates.com/d/USD/GBP/graph120.html
posted by lpcxa0 at 12:09 PM on July 27, 2011
1. Can't predict the future, so this is not the kind of question that has a certain answer. Particularly true in this case, where the political situation is unprecedented and where the consequences of a default would likely be severe and partially unpredictable. Given the inter-dependencies of the economies, the UK is not exactly a safe-haven if the US defaults (although it's probably reasonable to assume the Pound would strengthen more in this scenario.)
2. If you are incurring expenses are in dollars that you are counting on paying with this money, that's an argument for converting now, so that you are certain to be able to pay your bills.
3. If your wealth is primarily in dollars and you are ok with the risk of losing some buying power if the dollar strengthens, you might want to convert later. This essentially would be a diversification of your savings for the next month, giving you (some) protection against worst case scenarios as the political situation plays out.
posted by blue mustard at 12:12 PM on July 27, 2011
2. If you are incurring expenses are in dollars that you are counting on paying with this money, that's an argument for converting now, so that you are certain to be able to pay your bills.
3. If your wealth is primarily in dollars and you are ok with the risk of losing some buying power if the dollar strengthens, you might want to convert later. This essentially would be a diversification of your savings for the next month, giving you (some) protection against worst case scenarios as the political situation plays out.
posted by blue mustard at 12:12 PM on July 27, 2011
This gets asked over and over again and the answer's always the same: no one knows.
posted by turkeyphant at 12:43 PM on July 27, 2011
posted by turkeyphant at 12:43 PM on July 27, 2011
Four reasons to go now:
1. You get the best rate now that there has been for several months - even if the pound strengthens further after your transaction you can reassure yourself that it could have been much worse.
2. You, rather than the company that owes you the money, start to earn interest on the sum transferred (just guessing that this might be the case).
3. Not sure about the differences in the metrics used - but USA appears to have a lower inflation rate eating into the value of a dollar than does the UK in GBP.
4. Most importantly: you get the make the decision and move on to worry about other things.
posted by rongorongo at 3:17 PM on July 27, 2011 [1 favorite]
1. You get the best rate now that there has been for several months - even if the pound strengthens further after your transaction you can reassure yourself that it could have been much worse.
2. You, rather than the company that owes you the money, start to earn interest on the sum transferred (just guessing that this might be the case).
3. Not sure about the differences in the metrics used - but USA appears to have a lower inflation rate eating into the value of a dollar than does the UK in GBP.
4. Most importantly: you get the make the decision and move on to worry about other things.
posted by rongorongo at 3:17 PM on July 27, 2011 [1 favorite]
As lpcxa0 points out, GBP:USD has remained relatively stable for several months.
I have to disagree with what the foreground said, however - A deal might well send the dollar temporarily rallying, but only by a few cents on the pound. A failure to strike a deal, however, could realistically send the dollar plunging to the basement.
Or, of course, almost nothing could happen, in which case your choice doesn't much matter.
So you have to decide which risk you'd rather take - Missing out on a small gain, or safeguarding against a large loss.
For my own answer to that, I'll just say that I've done as much as possible over the past few weeks to diversify my own assets against a US crash.
posted by pla at 4:52 PM on July 27, 2011
I have to disagree with what the foreground said, however - A deal might well send the dollar temporarily rallying, but only by a few cents on the pound. A failure to strike a deal, however, could realistically send the dollar plunging to the basement.
Or, of course, almost nothing could happen, in which case your choice doesn't much matter.
So you have to decide which risk you'd rather take - Missing out on a small gain, or safeguarding against a large loss.
For my own answer to that, I'll just say that I've done as much as possible over the past few weeks to diversify my own assets against a US crash.
posted by pla at 4:52 PM on July 27, 2011
A U.S. default will affect the financial system globally in a way that no one understands yet. I can't be sure that it won't devastate GBP as well. Also, the Brits have their own problems, so who knows what else might cause the pound to lose a lot of value against the dollar in the next months?
When I lived in the UK, I knew someone who did his PhD on modeling the foreign exchange markets. He convinced me that I am very unlikely to beat the sophisticated investors in the market in the short-term, and that as an individual, I have high transaction costs for participating. The best strategy as an individual is to try to reduce these transaction costs as much as possible. So if you think you will ever visit Britain, the best thing to do might be to keep some money in a British account and avoid a costly exchange rate.
There are other risks and costs not being considered in the case of leaving the money with the company for the next month. First, they get the interest as rongorongo mentions, but second, there's always the possibility that something could happen to the company within the month (perhaps they, too, will be financially harmed by a default or other event) and they won't be able to pay you anymore.
If you need the money to pay the bills, you definitely should take it now. If you're otherwise financially secure, then diversifying by leaving a little money in GBP for a month doesn't necessarily sound horrible, although I'd rather have it in a bank than in the company's hands.
posted by grouse at 5:24 PM on July 27, 2011
When I lived in the UK, I knew someone who did his PhD on modeling the foreign exchange markets. He convinced me that I am very unlikely to beat the sophisticated investors in the market in the short-term, and that as an individual, I have high transaction costs for participating. The best strategy as an individual is to try to reduce these transaction costs as much as possible. So if you think you will ever visit Britain, the best thing to do might be to keep some money in a British account and avoid a costly exchange rate.
There are other risks and costs not being considered in the case of leaving the money with the company for the next month. First, they get the interest as rongorongo mentions, but second, there's always the possibility that something could happen to the company within the month (perhaps they, too, will be financially harmed by a default or other event) and they won't be able to pay you anymore.
If you need the money to pay the bills, you definitely should take it now. If you're otherwise financially secure, then diversifying by leaving a little money in GBP for a month doesn't necessarily sound horrible, although I'd rather have it in a bank than in the company's hands.
posted by grouse at 5:24 PM on July 27, 2011
Your best bet is probably to exchange-cost average (ECA) your pounds into dollars
What you'll be doing is converting a fixed number of pounds into a variable number of dollars at fixed intervals. For example, lets say you have 30,000 pounds total. You divide that--figuratively, not literally--into 8 lump sums of 3,750 pounds. Next, you might decide that every three months you'll exchange 3,750 pounds for dollars, such that after 24 months you'll have exchanged all 30,000 ponds.
That's just one example of how you might define the three parameters you need to define beforehand:
a) the fixed amount of pounds exchanged each time
b) the interval of time between each exchange
c) the total length of time between first and last exchanges
A currency exchange amounts to selling one currency (pounds) and buying another (dollars). Regardless of the underlying market--currencies, stocks, bonds, commodities, equity and index options, real estate--you generally want to be a buyer in a downtrending/weaking market, and a seller in an uptrending/strengthening market. Again, this rule is valid for all underlying markets.
By using a scaled plan to sell pounds and buy dollars, you'll automatically be buying more dollars when the dollar is weakening against the pound, and buying fewer dollars when the dollar is strengthening. Over the long term, this should work to your advantage
Also, given your seeming concern about economic conditions worsening in the near term, you probably will find that a gradual, disciplined approach like ECA eases your worrying. By adhering to a fixed plan, you free yourself from having to make any more decisions about when and in what quantity to exchange you pounds
The key potential disadvantage of ECA is that multiple exchanges may lead to much higher transaction fees than a single exchange. Before doing anything, look carefully into the fee structure of whatever institution you choose to execute your exchanges through.
posted by BadgerDoctor at 5:50 PM on July 27, 2011 [1 favorite]
What you'll be doing is converting a fixed number of pounds into a variable number of dollars at fixed intervals. For example, lets say you have 30,000 pounds total. You divide that--figuratively, not literally--into 8 lump sums of 3,750 pounds. Next, you might decide that every three months you'll exchange 3,750 pounds for dollars, such that after 24 months you'll have exchanged all 30,000 ponds.
That's just one example of how you might define the three parameters you need to define beforehand:
a) the fixed amount of pounds exchanged each time
b) the interval of time between each exchange
c) the total length of time between first and last exchanges
A currency exchange amounts to selling one currency (pounds) and buying another (dollars). Regardless of the underlying market--currencies, stocks, bonds, commodities, equity and index options, real estate--you generally want to be a buyer in a downtrending/weaking market, and a seller in an uptrending/strengthening market. Again, this rule is valid for all underlying markets.
By using a scaled plan to sell pounds and buy dollars, you'll automatically be buying more dollars when the dollar is weakening against the pound, and buying fewer dollars when the dollar is strengthening. Over the long term, this should work to your advantage
Also, given your seeming concern about economic conditions worsening in the near term, you probably will find that a gradual, disciplined approach like ECA eases your worrying. By adhering to a fixed plan, you free yourself from having to make any more decisions about when and in what quantity to exchange you pounds
The key potential disadvantage of ECA is that multiple exchanges may lead to much higher transaction fees than a single exchange. Before doing anything, look carefully into the fee structure of whatever institution you choose to execute your exchanges through.
posted by BadgerDoctor at 5:50 PM on July 27, 2011 [1 favorite]
I sort of agree with foreground's emphasis of the uncertainty here.
That said: presuming you - being in the US - already have a bunch of USD denominated assets, I believe there's something to be said for retaining that extra diversity of holding some sterling, given you've been put in this position anyway. It's not like you will need to pay the transaction costs of diversifying out of USD.
It's like someone is offering you a little bit of free insurance in case the USD starts sucking even more.
posted by pompomtom at 7:16 PM on July 27, 2011
That said: presuming you - being in the US - already have a bunch of USD denominated assets, I believe there's something to be said for retaining that extra diversity of holding some sterling, given you've been put in this position anyway. It's not like you will need to pay the transaction costs of diversifying out of USD.
It's like someone is offering you a little bit of free insurance in case the USD starts sucking even more.
posted by pompomtom at 7:16 PM on July 27, 2011
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Summary: Betting on the direction of forex short-term is a mug's game.
posted by the foreground at 11:50 AM on July 27, 2011 [2 favorites]