Bermudians travelling to the UK will be finding things more expensive than in recent months, as the UK pound reached its highest level against the dollar in six months yesterday.
In morning trading in London, the pound broke through the $1.60 level for the first time since November last year. Over the past few months, the pound touched a 24-year low of $1.35.
The pound rose through the $1.60 level yesterday for the first time since November as increased appetite for riskier assets kept the dollar under pressure, despite ongoing worries about Britain's massive borrowing.
By late-morning London time, the pound was up 0.3 percent at $1.6016, having earlier hit a high of $1.6030. In between November and now, the pound had fallen to a near 24-year low of just above $1.35 amid mounting worries about the state of the British economy and the level of government borrowing.
However, some signs that the British economy was over the worst of the recession and an improvement in stock markets around the world helped the pound clamber off its multi-year lows as investors were enticed back into riskier assets.
That means the dollar has lost much of its safe haven status which supported it during the winter. As investors fled stocks and other investments perceived as too risky, they parked cash in dollar assets such as US Treasuries; as markets have risen and risk appetite returns, that process has gone into reverse.
Concerns about Britain's debt levels resurfaced last week when credit ratings agency Standard & Poor's revised the country's outlook to negative from stable because of massive borrowing to deal with the recession and the banking crisis.
Though the revision does not trigger a formal re-evaluation of Britain's rating — unlike being put on credit watch — but does mean that policy makers have to be aware that a downgrade may happen if public finances do not improve.
After suffering some selling on the back of S&P's warning, investors started to fret that the US may also face a possible downgrade, which would raise the costs of funding its own massive fiscal deficit.
Many analysts remain sceptical about the pound's ability to continue to march higher given the raft of economic problems the country faces, not least in relation with the level of borrowing.
"Increasing government debt can only lead to higher taxes and a subdued economy for years to come, which does not make for a prosperous future," said Philip Manduca, head of investment at ECU Group.
Manduca also said he was "failing to grasp" how the US can tolerate significant dollar weakness at a time when it needs to entice global investors to finance its own yawning budget deficit through the purchase of Treasury bills.
As well as weakening against the pound, the dollar has fallen to near 2009 lows against the euro, which briefly breached the $1.40 level earlier this week for the first time since early January.
China's view of dollar weakness is crucial as it is the biggest buyer of US bonds. Over the last few months, there have been a number of concerns voiced from Chinese administration officials about the weakness in the dollar and how the country mitigates the risk of its exposure to the US currency.
US Treasury Secretary Tim Geithner will be going to Beijing later this week to discuss economic matters with his counterparts in China and the dollar is expected to be one of the key topics of discussion.
