Will the GBP/USD Reach Dollar Parity?

Given the unprecedented amount of debt in the United States—a staggering 34 trillion dollars—the dollar's value is declining year on year. This unfathomable debt could lead to the pound sterling reaching dollar parity at some point in the future.

The current debt-to-GDP ratio in the United Kingdom is just 2 billion, a figure 1,7000 times lower in comparison to the US. Despite the UK's current economic status, history has shown that the pound has indeed reached parity with the dollar in the past.

Historical Context

In the 1970s, the exchange rate was 2.40 dollars to the pound, a time when British currency was far stronger than it is today. Recent times have seen the exchange rate getting close to parity, and in the 1980s, it reached 1.80, briefly touching parity. A century ago, the rate was around 5 dollars to the pound, indicating significant decline in the pound's value against the dollar over time.

Britain's gradual reduction in size and increased economic challenges due to Brexit have further weakened the pound. With Brexit essentially chopping 20% from the value of the pound, and potential future impacts, the pound's decline against the dollar is a realistic possibility.

Modern Observations

For over two decades, the British pound has consistently been stronger than the US dollar. As of July 31, 2020, the GBP/USD exchange rate was at 1.32. Over the last decade, the range has fluctuated from a high of 1.70 to a low of 1.23. While the pound has seen highs around 2.00 and lows of 1.22 in the 21st century, it has generally been in decline.

Some confusion exists as to why the British pound is stronger than the US dollar, given the latter's stronger and more powerful economy. The simplest explanation is that currency valuation is not solely determined by nominal value and economic strength. Other factors, such as historical trends and macroeconomic policies, can also influence exchange rates.

Conclusion

While reaching dollar parity may seem unlikely given the current strength of the US dollar, historical events and economic trends present a possibility. Revisiting the pound's value from the 1970s and recent exchanges, it is indeed possible that the pound could reach, or even surpass, dollar parity in the future.

For American tourists, a drop in the pound could be a blessing in disguise. Cheaper prices and travel costs could make the UK a more attractive destination. However, for British consumers, a decline in the pound could result in higher import costs, affecting various sectors of the economy.