The British pound has hit a record low against the euro, sparking fears for holidaymakers planning to hit the beaches or slopes over Christmas.
For the first time since it was launched in 1999, the euro is worth nearly 88p while £1 will get you around €1.12. However, reports claim that at some airport currency bureau £1 will only get you €1.04 in return.
The pound was at its strongest around two years ago when £100 bought €145. But in the past year it has fallen by nearly 20%.
The falling pound is a direct consequence of the economic downturn in the UK and low interest rates. Currency traders have been selling off sterling in their droves amid fears that the recession in the UK could be worse than in other countries.
With the Bank of England having slashed the base rate by 3% to just 2% since October, foreign investors have also lost their appetite for the UK and are instead looking at alternative currencies with higher rates of return.
One currency loss is another’s benefit, and in this case the decline of the pound has given a major boost to the euro.
Rupert Lee-Browne, chief executive of foreign exchange company Caxton FX, says currency traders see Europe as being in a better position to recover from the current financial crisis.
Most European countries are less burdened by debt than the UK, and as interest rates set by the European Central Bank are not as low as those set by the Bank of England, the euro is seen as a better bet than the pound.
Lee-Browne adds: “The fall in sterling is all about a lack of confidence in the pound as investors believe the UK will be hit the hardest by the worldwide recession. With this much confidence in the euro, we could see parity by the end of 2009.”
Impact of falling pound on...
The devalued pound is bad news for holidaymakers travelling to the eurozone as the amount of currency your money buys will be depleted making things more expensive.
The advice from exchange firms is to buy some of their currency now or risk losing even more money.
Stephen Heath, chief executive of FairFX.com, says: "It may only be a matter of time before we reach the shocking stage when people will only get €1 to £1. Anyone planning to buy euros soon would be wise to buy half now at today's rates before they fall even further, and the rest later just in case sterling improves."
He also reminds travellers to avoid changing currency at airports, where the exchange rate tend to be less competitive than high street providers (such as M&S and the Post Office) or from specialist online firms.
"Regional airports have long taken advantage of travellers who leave buying their holiday cash until they reach the airport by offering far worse rates than outside the terminal," Heath adds.
There is some respite from the weak pound. Research from the Post Office shows that the cost of coffee, suncream and other holiday essentials varies from country to country, so if you choose your destination wisely your euro could go further.
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|Source: Post Office Holiday Barometer for the eurozone December 2008|
2. British economy
A weak pound against the euro might sound like bad economic news, but in actual fact a strong euro is good for many British sectors that export.
The eurozone makes up 60% of UK exports, and currency fluctuations should make British goods even more attractive.
However, on the other side of the proverbial coin, a weak pound means importing from the eurozone is more expensive and this cost could be passed on to consumers through price hikes.