Pound caught in 'currency market tsunami'

Tourists, owners of foreign homes, and anyone sending money abroad to family or friends have been caught in a "currency market tsunami" - and it is not over yet. Experts believe the pound could sink to $1.40, losing almost a third of its value from its highest point.

For Bob Munro, senior currency strategist at foreign exchange provider HiFX, the full effects of last week's currency meltdown will not be evident until "after the waters have receded" - but the tidal change was due to the dollar's strength rather than the pound's weakness.

"It's estimated up to 75% of hedge funds are dollar-based, either directly or due to their base currency being linked to the greenback," said Munro. "When non-dollar assets are sold, the dollars must be re-purchased, leading to the current enormous demand.

"There is a strong possibility that both the volatility and the dollar strength will continue. We might expect a $1.40 to $1.70 range in coming weeks or even days, before there is any chance of the dust settling. What is left when this currency market tsunami finally recedes will have to be assessed at the time."

Rupert Lee-Browne, chief executive of Caxton FX, also warned sterling could fall to $1.40 against the dollar. Over the last two weeks the pound has tumbled nearly eight cents, the biggest fall for five years.

Some experts blamed Bank of England Governor Mervyn King for saying the country was already in a deep recession and warning of further sterling weakness. However, Lee-Browne said sterling's slide was due not just to King's remarks, which hinted at further interest rate cuts, but to investors selling emerging market assets for dollars.

"The fall in sterling has been quite extraordinary," said Lee-Brown. "This is about the strengthening of the dollar on the back of the belief the US will be the first out of the recession. It is no longer about interest rates."

Travellers can lock in exchange rates using pre-paid cards. Caxton FX has euro and dollar cards for buying currency free of charge at a time when you think the exchange rate is likely to be most favourable.

The FairFX currency card, which costs £9.95 for a three-year membership, is a MasterCard chip-and-pin pre-paid debit card. Euros or dollars can be loaded by logging on to its website and paying with any sterling debit or credit card or internet bank transfer.

The Tesco Travel Money Card comes with a free second emergency card so that if the original card is stolen, the second can be activated for instant access to funds. Customers load the chip-and-pin card with foreign currency before travel and it is not linked to any personal bank account.

There are no fees for issuing the card, loading, commission, foreign purchase or a monthly administration fee but there are fees for cash machine withdrawals abroad. Other cards are available from Lloyds TSB Travel Money Card, the Post Office and InsureandGo.

With the pound falling from 1.44 in the past year and from $2.05 dollars, those heading overseas need to ensure they do not lose out by also being hit with hefty foreign exchange fees and transaction charges. "While the weakness of the pound is of concern to holidaymakers and online shoppers, using the wrong foreign exchange product can be even more costly," said Steve Willey, head of credit cards at moneysupermarket.com. "A credit card with purchase protection of 90 or more days is the best option for purchases overseas.

"Not only do the credit cards from the Post Office and Nationwide offer this, but they also have 0% purchase offers of three months and don't levy foreign exchange fees. This is a far better prospect than most of their rivals that charge between 2.5% and 3%.

"The Nationwide Flex debit card is the best product for overseas cash withdrawals as there are no extra charges. In contrast, a $100 withdrawal with a Lloyds TSB debit card would incur a £2 transaction charge plus a $2.99 foreign exchange fee."