Exchange rates: a visual analysis of money

Since the study abroad became official, I have been obsessing over the exchange rate from US Dollars to Great Britain pounds. Budgeting for the trip becomes complicated the more volatile the exchange rate. This spring, the exchange rate has been rising steadily, by which I mean the dollar has been worth less and less between January and late May as I write this post. (I am either going to revisit or revise this post as we go through the summer.) The difference has been negligible: we're talking basically about a 2¢ per dollar difference. Not a big deal until you multiply that 2¢ by all the participants in the study abroad and all the activities planned over six weeks. Its enough to make me pull out my hair as I try to maintain some sense of how much money is actually being spent. In 2011, as the trip proceeded, the same phenomenon resulted in students getting a refund once we returned because the exchange rate changed in favor of the US Dollar. I was a little more conservative with my budgeting in 2011, but it was awfully ice to have a cushion. In April, it rose to a high of $1.64 to the pound, by June it had fallen back to $1.62, and when we departed in July, it had fallen further to $1.61. That won't happen this year. Actually, it may happen. And that's really my point: there's really no way to anticipate the fluctuations, however minor.

The exchange rate looks like it is in our favor at a really long-range 10-year historical rate. That big falloff of value through 2008 into 2009 was when the US adopted its budgetary austerity policy that strengthened the dollar around the world. Britain has since joined the austerity trend, and if you look carefully there has been a cyclical trend from 2010 through 2013. We're still much better off than in 1935, when it cost over $5.00 for each pound (£).

10 years of US Dollar to UK Pound exchange rate
XE.com provides both current and historical exchange rate information

This 10 year chart spans from $1.35 to $2.15, which is a wide fluctuation. It would be impossible to account for this level of volatility in any budget let along a modest study abroad budget. Luckily, we are dealing with a fairly stable 2¢ to 4¢ per month difference and not 80¢.

Here, the one year chart looks volatile. But look again at the left axis. The fluctuation is only 20¢, from $1.45 to $1.65. And there is a clear trend upwards with cyclical upward and downward trends.

1 year of US Dollar to UK Pound exchange rate

For us this one year view looks absolutely terrible as it shows the dollar consistently weakening from last July to a high in late May. There are numerous factors that contribute to this strengthening of the pound. First and foremost, Russian Oligarchs have investments in London-based financial institutions, and as tensions in Ukraine have risen, money has left the Russian and Ukrainian economies quietly arriving at London banks, or so I assert with absolutely no experience in international finance. Simultaneously, British financial news has been improving as US economic news has been flat. Glasgow is hosting the Commonwealth Games in late July right after the study abroad program ends--so hanging around in Scotland after the program may be fun, but finding a place to stay may be a challenge. Like the Olympics, which stimulated building construction and employment in London, the Commonwealth Games are improving all of Britain's economy. These games are like the Olympics and are held among all the former colonies of Britain except for the US: Canada, India, Australia, New Zealand.

At the same time Britain is getting all this good economic news, the European Union is experiencing its own challenges, and the Pound (£) has done as well against the Euro as the dollar, starting in June at 1£ = 1.22€ after starting last August at 1£ = 1.14€. The Dollar-Euro exchange has held roughly steady at about $1.35 per 1€.

All this analysis leads to naught, however, as the Pound (£) could become more or less expensive. Yet the news this week has generally been good for us as this last image shows, and when the US stock market does well, there seems to be a loose correlation with the exchange rate. But remember this is only a 2¢ drop this week, or a 4¢ drop over a month.

Short-term exchange rates can be misleading

Although today has the Pound (£) returning to lower rates against the dollar, the one month chart only shows a 4¢ range. What does that mean? Well, it means that lunch priced at £4.98 would have cost the equivalent of $8.32 on April 28. On May 5th, that same lunch would have cost $8.46, and May 26 that same £4.98 sandwich would again cost $8.32. Students in 2011 were buying their £4.98 lunch for $8.06 in June of 2011. It is a more significant difference, a bit of a preoccupation, particularly when managing the cost of accommodations for 11 students for six weeks when a 4¢ fluctuation results in an $800- difference.

So I am hoping that the US economy delivers strong news and the exchange rate continues to shift in our favor, but it is just as likely that it will become marginally more expensive. What I will predict is that £4.98 is a good estimate for an inexpensive lunch, and it will probably cost, in dollars, no less than $8.10 and no more than $8.95. I expect it to cost $8.40-$8.50 while we are in Dundee. It means you have to watch your money a little closer, and have two of three fewer bags of crisps during the whole trip if you are on a tight budget, but it should be a minor inconvenience rather than a financial struggle.

How's that for an explanation of money? Or at least the US/UK exchange rate?