How changing currencies have affected you in 2010(Image: Sang Tan - AP)
Image: Sang Tan - AP
Contrary to what we might think, the pound - or any currency - doesn't 'win' if it goes up in value, enabling you to buy more foreign currency. Nor does it lose if it depreciates, so you can buy less of other currencies. In either scenario, some of us who earn in pounds win and some of us lose.
Here's how we've done in 2010 in terms of holiday money, investing overseas and the implications of currency changes on our domestic economy.
Up against euro, down everywhere else
From the beginning of this year to the middle of December, the pound has fallen, menaing it buys less of just about every currency that counts. We can buy 4%-6% fewer New Zealand dollars, Chinese yuan, Brazilian reals and Indian rupees, for example.
While prices against the dollar, Turkish lira and Russian rouble are roughly where they were at the start of January, the Icelandic krona, Singaporean dollar and Swiss franc cost us 9%-10% more. The Australian dollar is the killer, costing us 12% more (bad news for cricket fans heading Down Under for the Ashes).
Of the currencies I looked at, sterling only saw an improvement against the euro, as we can now buy 6% more of the currency for the same price - and have been able to for much of the year.
So those of us heading to Europe for holidays at least had more spending money in our pockets.
Prices stay the same, but our money doesn't
These movements in exchange rates are important for travellers because the price of the goods you're buying overseas don't fluctuate so wildly.
In Australia, a hotel costing A$100 per night at the start of the year still probably costs around the same in the local currency today. That remaining equal, a 12% rise in the cost of buying the Australian dollar means your room will cost you more.
Yet it is never possible to know when is exactly the right time to buy your holiday money. Visitors to Turkey could have got as good an exchange rate in August and today as they got at the beginning of the year. But, at the low points in spring and autumn, it would have cost you 9% more to buy the Turkish lira.
This is because, in the short term, currency prices are based on our expectations, particularly the expectations of currency traders.
These can change as easily and swiftly as the news headlines that influence them and are often not based in reality. Hence, there's little point trying to guess when it's a good time to exchange your money in the months leading up to your holiday.
Why investors are winners
Bad news for this year's travellers is good news for overseas investors. If you bought shares overseas (which you can do with just about any UK stockbroker), or any other foreign assets, you will have done so in the local currency. As that currency has probably become more valuable compared to the pound this year, it will have helped boost your investment in pound terms if you were to sell now and take the (pounds) cash.
To put it another way, if you bought shares in an Australian company at the beginning of the year, you will be investing in the Australian dollar too. That dollar is up 12% on the pound, so selling those shares now you'll get more for your money. This Australian dollar rise will have boosted any gains in your share's upward climb on the stock market or reduced your losses if it fell.
If you invest in FTSE 100 companies, you will also have benefitted. There are varying estimates and it fluctuates quite a bit from year to year, but somewhere between 40% and 70% of the UK's 100 biggest companies' profits are reported in foreign currencies.
The long and the short term of it
A detailed report from London Business School professors Elroy Dimson, Paul Marsh and Mike Staunton revealed that, over the long run, everything tends to balance out when investing overseas.
That means investors diversifying in lots of countries and holding on for very long periods could probably expect not to lose or gain much from currency changes - and could therefore concentrate more on the investments themselves, instead of worrying about currency.
However, in the short run, appreciating currencies, like the Australian dollar and Brazilian real, will have helped make you richer this year.
It may be that lower consumer and government spending will mean continued low interest rates to encourage more borrowing and spending. That means more people will borrow pounds cheaply and invest them elsewhere, which they'll have to do buy selling pounds and buying other currencies. This carry trade might push up prices of the currencies in demand in 2011, and put further downward pressure on the pound.
The economy is on the fence
Finally, here's what this year's currency movements mean for our economy, jobs and pay packets.
As I said, the pound is weaker against most foreign currencies this year. That is great for exports, because our goods are cheaper for foreigners to buy, which means more orders and more profits and leads to more jobs and potentially larger salaries.
However, this is offset by the pound being up against the euro over the year - and euroland is by far our biggest export partner.
On balance, though, it seems export orders are up in 2010, so although the economy is on the fence, it's leaning forwards quite heavily. Still, this change might not yet have been enough to make up for the cuts in spending we can expect next year, which will reduce domestic orders and company profits - and jobs.