The U.S. dollar is trading at 20-year highs against the pound, but why?
There's a few reasons:
1. Aggressive monetary tightening by the US Federal Reserve has raised interest rates faster than BoE, creating strong demand for the dollar.
2. As the world's reserve currency, the dollar has safe haven status and with uncertainty caused via Russia Ukraine war, China's lockdowns and fears of a global economic slowdown, countries are wanting to hold more dollars to weather potential economic shocks, pay for imports and service national debts, thereby increasing dollar demand.
Conversely, the pound has been weakening due to high inflation, soaring energy prices, the same geopolitical uncertainty, and the financial markets lack of faith in UK government's leadership, who have been selling off the pound in response to Liz truss recent emergency mini-budget.
So how could the strong dollar and weak pound impact the UK housing market?
Potential homebuyers
A falling pound means peoples' money won't stretch as far when they pay for goods and services imported from overseas.
This means commodities like oil and food are increasing in real terms.
Almost 50% of Britain's food is imported so shopping becomes more expensive if buying overseas produce.
If higher living expenses then it means its more difficult to save for house deposit or afford new (higher) mortgage rates. All which could have an impact on amount of buyers in the market.
Fewer buyers means we could be unlikely to see further aggressive price growth.
Developers
A weak currency can exacerbate inflation as it makes our imports more expensive. V important for home builders who are seeing their costs rise and margins squeezed:
In 2021 China was the main trade partner for construction material imports into the United Kingdom.
That year, the UK imported nearly 4.3 billion British pounds worth of building materials from China.
If construction costs become more expensive due to the weak pound, dev't schemes could either be shelved if they become unprofitable, not delivering on much needed supply to the mkt, or increase asking prices, further adding fuel to fire of buyer affordability.
American investment
However, while the benefits are hard to see from UK perspective, US investors with cash to spare are investing it overseas.
High value areas such as London are emerging as some of the most popular European markets for Americans.
The reality is the fall in value of the pound suggests we are entering a period of poor economic growth. And with persistently high inflation we could be entering a prolonged period of stagflation, which would easily offset any benefits of a weak currency.
