You might be wondering why the British pound remains mightier than the U.S dollar when the United States’ economy is much stronger than Great Britain’s. What makes this fact more complicated is that, as of this writing, the British pound is worth $1.35 to US dollar’s $ 1.75.
To answer this, you have to be aware of the fact that a country’s economic strength and its currency’s nominal value are independent of each other.
Let’s take Japan as an example:
As of this writing, Japan remains the world’s 3rd largest economy based on its gross domestic product (GDP). Take note that its GDP is 50% larger than Britain’s. Yet, as in October 2018, it took close to 112 Japanese yen to 1 U.S dollar and 147 yen to 1 British pound. Here, we can see that a country’s currency nominal value and economic strength have nothing to do with each other.
Nominal Value Versus Relative Value
A currency’s nominal value is an irrelevant factor when measuring a country’s economic strength because of its arbitrary nature. The relevant factor you should look into is how the value of the currency changes over time relative to other currencies.
The Price of Brexit
Great Britain’s Brexit move, as expected, has caused immediate and severe national economic consequences. Brexit has triggered the British pound to sink in value by over 8% just a day after the referendum.
In terms of nominal value, still, the British pound is stronger than the US dollar. But investors still chose to leave the British pounds because of its dangerous decline in relative value.
