Should UK expats take advantage of weak sterling exchange rate?

With sterling’s exchange rates against both the euro and the US dollar weakening, are there any opportunities that British expats in the UAE can take advantage of, given their earnings are in the dollar-pegged dirham? SN, Abu Dhabi

The expert advice

Chris Ferguson, director at Credence International

This is a good question, and one that is certainly attracting attention at the moment. First let’s look at sterling. The upcoming election next month and a rather uncertain outcome could easily provide a further bumpy ride for the pound. Anyone with dirhams or dollars could wait to see what happens there; if there is a return to the low of May 2010 at 1.42, you could fix the rate of any sterling expenses such as mortgage costs. This can be done by forward-buying currency at the current rate, locking in a low. With cash savings or proceeds from a UAE property sale, it could be a great time to get out of a dollar-pegged currency and buy some sterling. Investors can opt for sterling investments but still have global exposure because of the diversity of the UK stock market.

In relation to the euro’s near-parity with the dollar, the above advantages can also be taken, as the rate is advantageous for the dollar. I would, however, expect to see parity between this currency pair shortly, considering the pace at which the European Central Bank is printing money. Investing in certain European equities right now could be a good idea, as the euro weakness is helping exports and growth, but this needs to be approached with caution as there are still many unknowns in Europe.

British expats should consider their long-term currency needs, taking into account factors such as your retirement jurisdiction and existing asset mix before making decisions.

When investing in the pound or the euro, although there is volatility in the currency markets it is always important to understand that your exposure should not vary by huge amounts. You should assess your attitude to risk and build a portfolio of assets related to your risk appetite.

To go overweight or underweight on certain assets because of market movements is fine, but making huge transactions can sometimes add risk you did not originally want. To even out risk in currencies you can make various timed transactions to create a dollar-cost average, and then you are not all-in on a price that could go either way.

The reader’s advice

Simon Hodgkin-Smith, Abu Dhabi

It all depends on what your future plans are. If you are a British expatriate with investments in the UK or plans to return there in the future, then it makes sense to transfer any dollars or dirhams into sterling – whether as a lump sum or a regular monthly payment. I transfer a fixed amount every month and have done so for many years to take advantage of dollar-cost averaging – though I have been striving to increase the amount I send home in recent months to cash in on the lower rate. However, there is no point doing this if you have minimal investments on British soil and no plans to return to the UK; in that scenario you may as well stick with your dollar-linked investments. However, if it’s Europe you plan to retire to – whether Cyprus, Greece, France or Spain (the typical haunts for UK expats) – then switching your dollar investments into the euro also makes sense. I have always believed it is best to invest your money where you plan to end up in your golden years. Take a long-term strategy and make regular transfers, as with dollar-cost averaging everything should balance itself out in time for your retirement.

The next Money Clinic:

As a saver, I feel confused. I have a large pot of cash saved up in a fixed-rate account that is coming to the end of its fixed period soon. I’m wondering whether to take on another fixed deposit tenure or keep it in a variable-rate account to see if interest rates go up. Are there any indicators that global interest rates will rise any time soon? MN, Dubai

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The advice provided in our columns does not constitute legal advice and is provided for information only. Readers are encouraged to seek appropriate independent legal advice

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