Elroy Dimson, emeritus professor of finance at the London Business School, said: “Over the long term, the pound has been weak against the dollar, depreciating over the past 116 years by an annualised 1pc – that is largely attributable to Britain’s higher inflation rate, which had the effect of debasing the purchasing power of the pound.
“If you look at the real (inflation adjusted) exchange rate of the pound against the dollar, it has weakened over the past 116 years by a minuscule 0.22pc per year.”
David Blake, professor of pension economics at Cass Business School, said: “The chart shows precisely what you would expect – that the real exchange rate shows no real trend from when sterling started floating against the dollar following the collapse of the Bretton Woods agreements.
“This is because the nominal exchange rate will adjust to reflect differences in inflation rates in order to maintain ‘purchasing power parity’.”
What it means for investors
At present, due to the absence of significant inflation, movements in nominal and real rates are similar. The main concern is to avoid being overly exposed to the short-term volatility in a particular currency.
A well-diversified portfolio is key for investors to protect against volatility in any one market, financial planners say. Investing heavily in a single country exposes an investor not only to the performance of that investment, but also to how well that currency performs.