21st October 2026
When investors become nervous about wars, energy supplies or the prospects for the world economy, they often move their money into assets regarded as safe havens. The US dollar and Swiss franc are two of the main beneficiaries. But where does the British pound stand, and what happens to the UK if the dollar remains strong while oil prices stay high?
The answers matter to households, businesses and the wider economy. Currency movements can seem remote from everyday life, but they influence the cost of petrol, diesel, heating oil, food, imported goods and, indirectly, the interest rates paid by borrowers.
For Britain, the combination of an expensive dollar and rising energy costs could prove particularly uncomfortable.
Why investors turn to the dollar
The US dollar occupies a unique position in the world economy. It is the principal currency used in international trade and finance, and oil is generally priced in dollars. The United States also has exceptionally deep financial markets, including a huge market for US government bonds.
When uncertainty rises, investors often prefer the liquidity and perceived security of dollar assets. This can happen even when the United States is itself involved in the political or military events causing concern.
Switzerland offers a different kind of refuge. Its reputation for political stability, sound institutions and monetary credibility has helped establish the Swiss franc as a traditional safe-haven currency.
Sterling remains an important international currency, supported by established financial markets and the UK's position in the global economy. However, it does not enjoy the same safe-haven status as the dollar. Britain's reliance on imported energy, relatively weak productivity growth and concerns about public finances can make investors more cautious.
That does not mean the pound must fall whenever the dollar rises. Interest rates, economic growth, inflation and political developments all influence exchange rates. Nevertheless, sterling can be vulnerable when international investors become more defensive.
The double squeeze from oil and the exchange rate
One of the most important consequences of a strong dollar is its effect on Britain's energy bill.
Oil is traded internationally in dollars. British importers therefore have to consider both the dollar price of oil and the exchange rate between the pound and the dollar.
Suppose oil costs $100 a barrel and the exchange rate is $1.35 to the pound. The barrel costs approximately £74 before transport, refining and other charges.
Now imagine oil rises to $110 a barrel while sterling weakens to $1.25 to the pound. The same barrel would cost £88. That is an increase of almost 19% in its sterling cost, despite the dollar price of oil rising by only 10%.
This illustrates the danger of a double squeeze. A rise in the oil price makes energy more expensive, while a weaker pound magnifies the increase for British buyers.
The consequences reach well beyond motorists. Diesel is essential to haulage, farming, construction and food distribution. Higher fuel costs can eventually feed through into supermarket prices, building materials and the cost of delivering goods.
Heating oil is an especially important concern for rural communities in northern Scotland, where many homes have no access to mains gas and alternatives can be expensive or difficult to install.
Inflation could return to the centre of the debate
If the dollar remains strong and oil prices stay elevated, the UK could face renewed inflationary pressure.
Businesses must decide whether to absorb higher costs, accept smaller profits or pass the increases on to customers. Some will have little choice but to raise prices. Others may reduce investment, delay expansion or cut staffing if consumers become less willing to spend.
This creates a difficult problem for the Bank of England.
If energy prices push inflation higher, the Bank may have to keep interest rates elevated for longer or consider further increases. Higher rates can support sterling by making UK financial assets more attractive to investors. However, they also increase borrowing costs for mortgage holders, businesses and the government.
There is an important distinction between inflation caused by a booming economy and inflation caused by an external shock. When demand is strong, higher interest rates may help cool an overheating economy. When the cause is expensive imported energy, higher rates cannot produce more oil or reduce the international price of gas. They can, however, weaken domestic demand.
Britain could therefore find itself facing the uncomfortable combination of stubborn inflation, higher borrowing costs and disappointing economic growth.
Could a stronger pound provide some protection?
A stronger pound would help offset some of the increase in dollar-priced imports. It could make oil, certain raw materials and imported goods cheaper in sterling terms than they would otherwise be.
But the exchange rate is only part of the story. If international oil prices rise sharply enough, a stronger pound may provide only limited relief. The final price paid by households also reflects refining, distribution, taxation and other costs.
Nor can Britain assume that higher interest rates will always support sterling. Investors also consider the country's longer-term economic prospects, the credibility of government policy and the sustainability of public borrowing.
A rate increase prompted by strong economic growth may inspire confidence. One prompted by an energy crisis that is damaging households and businesses may be viewed rather differently.
What can Britain do?
The UK cannot control the dollar or determine the global price of oil. It can, however, reduce its exposure to international energy shocks.
That means improving energy efficiency, strengthening electricity networks and storage, developing reliable domestic energy supplies and avoiding excessive dependence on imported fuels. Investment in renewable electricity can reduce exposure to volatile fossil-fuel prices, although the transition also requires substantial investment in infrastructure and dependable supplies when the weather is unfavourable.
North Sea oil and gas production also remains part of the debate. Domestic production can contribute to supply and employment, but it does not guarantee that British consumers will pay lower prices. Oil and gas are traded in international markets, so domestic output alone cannot insulate the UK from global price movements.
The government must also maintain credible public finances and improve the country's ability to generate sustainable economic growth. Investors need reasons to hold sterling beyond the prospect of earning higher interest rates.
The real danger is the combination of events
A strong dollar is not necessarily bad news for every part of the British economy. Exporters selling goods and services priced in foreign currencies may benefit from a weaker pound, while some international investors may continue to regard UK assets as attractive.
But the wider picture is more concerning if a strong dollar coincides with expensive oil, weak growth and renewed inflation.
That combination would squeeze household budgets, increase business costs and potentially complicate decisions on interest rates. For people in northern Scotland, where journeys are often unavoidable and heating oil remains essential to many homes, the consequences could be particularly severe.
Britain should not assume that the pound will collapse, nor that the dollar will remain dominant under every conceivable set of circumstances. Currency markets can change direction quickly.
However, the UK would be unwise to treat the present risks as merely a financial-market problem. The real issue is how exposed the country remains to events beyond its control.
If the dollar stays strong while energy prices remain high, the question will not simply be how sterling performs against other currencies. It will be whether Britain has enough economic resilience to prevent another international shock from becoming a domestic cost-of-living crisis.