Readers Question: Buying a new property in Montengro
- 215,000 Euros’s
paid 30% at exchange 1.47 to pound August 2007
20% due in 2-3 months. 43 ,000 euros
today exchange is bad news approx 1.23 to pound
- further 30% due around Nov -Dec 2008
20% on completion around April 2009
1.What are your predictions for the pound euro exchange rate at the time points above. June 08 – April 09?
I would be reluctant to stipulate a figure for the Euro / Pound exchange rate, especially with so much resting on your decision. People do talk of an exchange rate of 1 Euro to £1. This is because:
- Weakness in UK housing market and UK economy. This could lead to lower interest rates in the UK in the next 12 months. If the UK housing market really collapses as some people fear, the £ will only get weaker.
- Chance of Euro becoming worlds’ reserve currency instead of dollar. If central banks made the switch to the Euro, it would continue to gain in strength for a long time.
However, it is worth bearing in mind.
- The strength of the Euro is already causing problems for the EURO economy which relies on a strong export sector. Further rises would slow growth and increase chance of ECB cutting interest rates to stimulate growth.
- There are also signs of housing markets in Europe being overvalued. The Spanish and Irish housing markets looks set for a fall, this should weaken Euro growth and the value of the Euro : see: Economist article
- On balance I would predict the exchange rate to stay pretty close to the present value. i.e.1.30 I think it remain strong but not any more stronger. However, I should stress Economists have a very high propensity to be wrong when it comes to making predictions.
2. Are their ways to minimise our exposure to the volatility of the euro / pound exhange rate?
Big firms would buy futures contracts which give the right to buy Euros at a fixed price now. This helps to insure against a rapid appreciation in the Euro.
3. Can we do anything with the sterling funds we have now to claw back any future losses?
I’m not really an investor more of a peniless economists, so I’m not really the right person to advise. Sometimes in a recession, stock markets rise, but, since you are on a very tight budget, it would not make sense to invest in anything risky, especially at the moment given the turbulence in the financial markets.
4. in next blog post