Last night the pound fell almost 5pc against the US dollar to $1.0327 – its lowest position since 1971. It has recovered slightly since, to about $1.075 at the moment of writing, but it looks set for a long period of weakness against the currency. Anyone who has a holiday booked to the US in the next few weeks will obviously suffer a hefty dent in their budget. But what else will this slump in sterling mean for our holidays?
The first point to mention is that the value of the pound against the US dollar doesn’t just determine our exchange rate in America itself. Several countries link their currencies to the dollar, including prime winter sun destinations such as Barbados and several Eastern Caribbean islands, as well as the World Cup host, Qatar. Compared with a year ago, your spending power in all these countries has fallen from a rate of £1=US$1.38 to below $1.08 today. That means that the pound is worth about 22 per cent less than it was last October and for practical purposes, tourists will be getting an exchange rate of around £1=$1.
The strong dollar doesn’t just affect the costs on the ground you face when you visit these countries. It also puts upwards pressure on airfares – because aviation fuel is priced in US dollars, so any airline based outside the US has to pay more each time it refuels its planes.
The good news is that those fuel costs don’t yet seem to have filtered through to airfares – partly because the oil price has been weakening recently. The bad news is that it isn’t only against the dollar that the pound is taking a hit.
Overnight it fell against every currency in the world. Until last week, we could take some solace in the fact that the euro has been suffering against the dollar almost as much as the pound has. But now that has changed. This time last year, a pound bought €1.17. Now it buys €1.11.
And nearly all holiday destinations – including Thailand, South America and Brazil, which have traditionally offered good value against sterling in previous crises – are not looking such good bets at the moment. The pound was worth 45 Thai baht a year ago, now it buys less than 41. It has dropped five per cent against the South African rand over the same time period, but it has fallen from 7.30 to 5.71 against the Brazilian real. Even these numbers don’t tell the whole story. They are the money market figures – tourists get stung by even worse rates.
What about other currencies? Since last October the pound has fallen 13 per cent against the Indian Rupee, more than 12 per cent against the Australian dollar and over 15 per cent against the Canadian dollar.
The only popular destination to hold out a little hope to hard-pressed holidaymakers is Turkey. Sterling is currently falling against the lira, but at least has strengthened hugely over the last year – up more than 64 per cent, from buying just under 12 lira, to nearly 20. You only have three or four more weeks of summery weather to take advantage of this, but if you can find a reasonably-priced flight to Istanbul this autumn (target price for a return is about £150), it might well be your best bet for an affordable city break.
Looking further ahead, it is always risky to second guess the markets. Perhaps sterling will strengthen. The dollar or the euro might suddenly take a hit. But travellers will be wise to assume that the pound will remain weak for at least a few months more.
If you have already booked a flight, your fare is safe. But if the pound continues at this level, it does mean the risk of surcharges on package holidays. Under UK law – incorporated from EU regulations – there are strict rules about how and when an operator can put up the price after you have booked and ask you to pay an extra charge. But these rules do allow them to do so following a significant drop value of the pound and increases in fuel costs.
If the company is a member of Abta, it must absorb the first two per cent of any increases. Beyond that, it can raise the price of the holiday to reflect the higher costs it faces. Your main protection is that, if any surcharge is higher than eight per cent of the original holiday cost, you have the right to cancel for a full refund. And no surcharges are allowed within 20 days of the departure date.
But even these rules mean that you could – in theory – be charged an extra £400 on a £5,000 family holiday and have no choice but to pay up. Meanwhile, it seems virtually certain that operators and airlines will be forced to put up their prices for new bookings.