Pound’s Rally, Boon for British Tourists, Hurts Exporters

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The New York Sun

The British pound’s biggest rally since 1990, a boon for British tourists, is catching company treasurers by surprise and eroding profits at exporters. Britain’s currency has climbed 9.2% against the dollar since December after the economy expanded the most in two years, foreign takeovers of British companies climbed 65% and central banks boosted their purchases of pounds for foreign-exchange reserves.

“Our exports are down this year,” said Peter Matthews, managing director of Black Country Metals Ltd., a Stourbridge, England-based company that buys and sells scrap metal, and exports 95% of its production. “We have to hedge everything, otherwise the profit line gets obliterated.”

Exports account for 29% of the $2.3 trillion British economy, Europe’s second biggest. The pound’s biggest quarterly advance since 2003 contributed to declines in exports in May and June, according to government data.

To help manage the risk of a rising currency, Black Country Metals buys contracts from currency dealers that guarantee delivery of pounds at a set price and date. Matthews said he purchases the contracts when he signs a deal with foreign customers to limit any losses should the pound soar.

Exporters rushed to buy the agreements, known as forwards, as the currency touched a 15-month high of $1.9143 on August 3. Corporate FX Ltd., a company that counts billionaire Richard Branson’s Virgin Group Ltd. among its clients, has doubled its sales of the contracts since July, the director of trading at the London-based dealer, Mark Smith Halvorsen, said.

“Exports are doing poorly,” said David Kern, the London-based economic adviser to the British Chambers of Commerce, which represents more than 135,000 British businesses. “The exchange rate isn’t the only problem, but it is important.”

The pound’s climb surprised strategists and companies alike. The median forecast of 53 analysts surveyed by Bloomberg in January was for a 3% gain this year to $1.77. It closed at $1.8814 last week. The Confederation of British Industry, Britain’s biggest employers’ group in March forecast the pound would slide to $1.70 by December 31.

British travelers welcome the currency’s advance. “This round-the-world trip cost about 20% less than I originally budgeted,” said Stanley Pignal, a London-based financial analyst at Royal Dutch Shell Plc, Europe’s second largest oil company. Pignal returned this month from a trip to South America, Asia and Africa that he originally anticipated would cost 10,000 pounds.

The pound is becoming a favorite currency for speculators, figures from the Chicago Mercantile Exchange show. Trading in pound futures at the exchange, the world’s largest market for the contracts, soared 126% in the second quarter from a year before, exceeding the 21% increase in trading of the euro against the dollar.

December pound futures contract traded at $1.8897 on the CME August 18, indicating investors expect the currency to add to its gains.


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