Sterling hands out a pounding to all its rivals

But boom sparks fears of export ‘squeeze’

THIS time last year the pound was one of the worst performing major currencies in the world. Not any more. Sterling smashed through $1.70 yesterday, hitting a high of $1.7062, a level not seen since October 2008. It has also been trading above €1.25 in recent days for the first time since November 2012.

The pound has now risen nearly 15pc against the US dollar and more than 9pc against the euro since its recent lows below $1.49 and €1.15 last July.

Sterling’s dramatic recovery over the past year is good news for Britons travelling abroad this summer, with the pound now buying far more than it did a year ago.

Tourists, of course, do not get the rate quoted on foreign exchange markets when they swap their pounds for dollars, euros and other currencies. But someone changing £ 100 today can get $ 168.66 or €123.86 compared with $156.05 and €116.30 a year ago, according to MoneySavingExpert.com.

Harry Adams, managing director of currency exchange firm Argentex Private, said the rebound in sterling ‘ comes at a very conveni ent time f or those travelling abroad for their summer holidays’.

But he warned that it will also ‘squeeze’ UK firms that export their goods and services overseas by making them more expensive.

The strengthening pound has caused alarm among UK exporters as it pushes up the cost of goods stamped ‘Made in Britain’.

And it is not just against the dollar and the euro. The pound is up 23pc against the Turkish lira in the past 12 months, 16pc against the Russian rouble and South African rand, 14pc against the Thai baht and 11pc against the Brazilian real.

‘It is certainly the case that manufacturers are monitoring exchange rate developments more closely than at any time over the past five years,’ said Neil Prothero, deputy chief economist at EEF, the manufacturers’ organisation.

However, just as there was no noticeable pick- up in exports following the sharp fall in sterling during the Great Recession of 2008 and 2009, manufacturing has performed strongly over the past 12 months.

Official figures last week showed factory output rose 2pc between February and April, the strongest threemonth performance since the Coalition came to power in May 2010. And the strong pound has reduced input costs f or manufacturers through cheaper imports.

‘ The modern economic environment in which firms now operate is very different from the standard textbook model of weaker sterling equalling higher exports and vice versa,’ said Prothero, pointing to increasingly globalised supply chains and offshore production.

‘There is an argument that the UK’s export performance through and since the crisis would have been far worse had the pound not depreciated sharply during the crisis,’ he added.

‘But the question facing policymakers and exporters alike is if the sharp depreciation in 2008 didn’t support much of an export revival, how much of an impact is being felt from the recent strengthening of sterling?’

The Bank of England is certainly keeping an eye on the exchange rate following a turbulent few years which saw the pound soar above $2 in 2007 before crashing to $1.37 in 2009.

Officials reckon the rise in sterling in the past 12 months has helped drag inflation down to a four-and-a-half-year low of 1.5pc by making it cheaper for UK firms to import goods.

‘The appreciation of sterling over the past year or so meant that import prices were probably starting to pull down inflation,’ said the minutes of this month’s meeting of the monetary policy committee.

BUT the Bank, which rarely comments on the exchange rate, has also suggested the strength of sterling could force it to leave interest rates lower for longer if it hampers efforts to rebalance the economy towards exports.

The rebound in sterling over the past year has been driven by the recovery in the UK economy and the prospect of the first increase in interest rates since 2007.

Until recently, i t was widely thought that the Bank would raise rates at some point next year, having held them at 0.5pc since March 2009.

But Bank governor Mark Carney last week said the long-awaited hike ‘could happen sooner than markets currently expect’ in a speech that sent shockwaves through the currency markets.

The prospects of a rate rise before the end of the year have bolstered the pound at a time when the euro and dollar have come under pressure from more dovish positions at the European Central Bank and US Federal Reserve.

The ECB cut one of its key interest rates into negative territory earlier this month while the Fed is expected to leave rates unchanged until well into 2015.

‘It is a given that the UK will be the first major economy to raise interest rates, and traders are reacting appropriately,’ said Adams.

Lee McDarby, executive director at Nomura International, said a rate of €1.30 ‘is by no means out of the question’ but added that $1.70 ‘has proven a tough nut to crack’.

‘Talk now seems to be of further sterling strength, but at the same time it is best not to get carried away,’ he said.

‘At some point the US will start to hike rates too.’

In the meantime, however, growing international confidence in the UK economy is giving Britons abroad more bang for their buck.