Business

Credit ratings, the pound, currency movements and you

All eyes were on the strength of the pound after Moody's downgraded the UK's credit rating - with many people's finances affected by the currency's performance.

On Friday, the UK's rating was cut from its AAA status for the first time since the 1970s.

As a result, sterling hit a two-and-a-half year low against the dollar and a 16-month low against the euro early on Monday, before recovering some of its losses.

The pound had already been losing some of its strength against the euro since the start of the year.

So, how might the strength or weakness of the pound affect you?

Holidaymakers

The most obvious effect for many people of a change in the strength of the pound is a change in the buying power of holiday money.

Image caption Currency firms say some holidaymakers have already been buying euros and dollars

The pound is stronger now than in 2008-09 when it was close to parity with the euro. Yet, any continued fall now would be felt by holidaymakers gearing themselves up for Easter or summer holidays.

Some 80% of UK holidaymakers take their breaks in eurozone countries, with Spain, France, Italy and Greece the most popular destinations.

David Swann, of Travelex, says that the currency firm recorded a big spike in the sale of euros and US dollars after Moody's downgrade on Friday.

"While no-one knows exactly what will happen, all the recent data and expert opinion has suggested there is a long road ahead for the UK's economic recovery, which will likely weigh on the pound," he says.

"Holidaymakers willing to venture further afield could benefit, with the pound still providing good value against a number of currencies, such as the Brazilian Real, Japanese Yen and South African Rand, where holidaymakers will get 11%, 12% and 12% more for their money compared to this time last year."

However, travel association Abta says that most people are unlikely to shift their holiday to areas outside the eurozone.

"Last year the pound rose in value against the euro by over 10% but recent pressures on the UK economy have seen the euro regain these losses.

"In 2013 as holidaymakers look to control budgets and avoid many aspects of negative exchange rates, many will book all inclusive holidays which currently account for over half of package holiday sales.

"A recent Post Office survey found that Spain was the cheapest holiday destination in the world for day-to-day expenses and even with a worsening exchange rate, the ongoing economic problems within the eurozone will continue to keep prices in bars and restaurants at a competitive level."

Chris Towner, of foreign currency exchange brokers HiFX, notes that the UK is on a stable outlook from Moody's, meaning there are unlikely to be any further shocks for the currency in the near future.

Expats

While holidaymakers might take a short, sharp hit from a weakening pound, a change in the strength of sterling may be more of a lingering issue for expats.

Image caption Many UK pensioners travel to eurozone countries for an extended winter stay

Hundreds of thousands of UK pensioners live in warmer countries in Europe during the winter, while still drawing a UK pension paid in pounds.

Financial advisory group deVere has calculated that many UK expats in Europe have seen their monthly retirement income reduced by an average of 8% since the start of the year.

"With the government and the Bank of England seemingly more than content with a lower pound at the moment, and with Moody's downgrade of the UK, it is likely that sterling will remain reasonably low for some time," says the group's chief executive Nigel Green.

"With this in mind, and to avoid being subject to further volatility in the currency markets, those who are living abroad and claiming a UK pension should consider the various ways to mitigate the fluctuations with their financial adviser."

Options might include setting up a system to transfer pension money at a fixed exchange rate each month, for certainty of income. However, expats could win or lose under this arrangement in the future as the pound moves against other currencies.

They might also consider what proportion of their savings is held in pounds and how much in other currencies.

Drivers

Even before the latest move by Moody's, the cost of filling up a car at the pump in the UK had been on the rise.

Image caption UK drivers have seen prices rise at the pumps since the start of the year

The cost of a litre of unleaded petrol has been heading towards the 140p mark in recent weeks,

Why? Because the price of petrol is inextricably linked to the strength of the pound against the US dollar.

Crude oil and refined products are traded in dollars and therefore become more expensive for British companies when the pound falls.

Petrol consumption in the UK fell in January, no doubt affected by the snowy weather.

But analysts believe that prices are likely to continue to rise in the coming weeks.

The UK's growing reliance on imported energy would mean domestic gas and electricity bills would increase if there was a long-term weakening of the pound.

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