Fears about Britain's public finances mean the pound has lost about a third of its value against the euro and a fifth against the US dollar during the past three years, creating misery for holidaymakers, retired expats and those with property abroad. But last week the pace of this decline accelerated, prompting fears of a sterling crisis. By midweek the pound to US dollar exchange rate was worth just $1.50, its lowest level for 10 months. It also lost value against the euro exchange rate – which has been struggling itself in recent months. This volatility has resulted in the the pound dropping to €1.11 in a matter of weeks.

These falls have been partly caused by speculation that there will be a hung Parliament, delaying Britain's economic recovery. And while uncertainty remains, there is the chance that the pound could fall further. currency brokers have said: "While no one can predict where the markets will end up, one thing we can be sure of in the coming months is no let up on volatility."

But whether you are looking to invest overseas, transfer money abroad, or go on holiday later this year, there are steps you can take now to minimise the risks that the currency markets may move against you. Bolder investors may even want to follow in the footsteps of George Soros – who bet against the pound in 1992 – and try to make money from our weaker currency.

BOOST SPENDING MONEY

The recent dive in the value of the pound will affect those due to travel abroad soon. According to Travelex, those heading to Europe will now get €22.17 less when exchanging £500, compared with the same time last month, the equivalent of a guided bus tour of Paris. Those travelling to the US will be $53.32 short when exchanging £500 compared with early February, the price of two main meals at LA's Chateau Marmont.

But David Swann, a currency strategist at Travelex, says: "Compared to a year ago, British travellers aren't faring too badly. Those travelling to the States are actually getting a slightly better exchange rate, while holidaymakers buying euros get just €13.74 less [again on £500]."

But travellers got a lot more bang for their bucks in 2007, before the credit crunch hit. Those switching £500 into euros got an additional €185.94 compared with today, while those changing money into dollars pocketed an extra $230.89.

Bob Atkinson, a travel expert with Moneysupermarket.com, said: "Even if you think the pound will weaken further, keep an eye on short-term movements; if there is a slight rally then you may want to use the opportunity to buy euros for the summer." But he also urges holidaymakers to ensure they don't pay over the odds on commission or charges: "Those who search out the best deal will get almost 10pc more spending money than those who simply leave it to the last minute and change their money at the airport."

Buy currency online, he advised, from either Travelex or Thomas Cook. "Online exchange rates are usually far more competitive than those offered at a bank or bureau de change." Even if you have left it to the last minute, it is possible to order online, and pick up the money at the airport, usually for no extra charge.

Check what charges are levied on debit and credit cards. If you are not travelling abroad until summer, apply now for one of the cheaper debit or credit cards available. Santander's Zero card and Nationwide's debit card remain two of the better options.

DON'T SAVE IN STERLING

Savers can open a euro or dollar exchange rate account - denominated account instead and will benefit if the pound weakens further against these currencies. (Although they lose out if it strengthens.)

These accounts are particularly useful for those who travel frequently or receive or make regular payments in another currency. Holding money in euros (or dollars) means customers don't have to pay frequent foreign exchange fees each time they travel, and it also helps protect them from currency fluctuations. For example, if you receive monthly rental payments in euros from a property, banking this in a euro account leaves you free to convert it back into sterling when exchange rates are more favourable

Cater Allen offers one account that allows customers to switch money between dollar, euro and sterling sub-accounts, at no cost. Most require a minimum deposit of at least £5,000. Historically, the interest rates paid on such accounts has been low, but given the rock-bottom rates paid on most British savings account today, this is less of a cost today.

According to Moneyfacts.co.uk, the top-paying euro accounts include Anglo Irish Bank (paying 2.25pc on £10,000) and Halifax International (paying 1.35pc, again on £10,000). Most dollar-based accounts pay less than 1pc – the only exceptions being Anglo Irish Bank (1.5pc) and Irish Permanent (1.5pc on a 30-day notice account).

REALISE OVERSEAS GAINS

The weak pound has increased the costs of maintaining a property abroad, but it does help those selling. Mr Bodega said HiFX has seen a significant increase in people selling overseas assets, repatriating to Britain and converting gains back into sterling. In total, HiFX says it has seen a 180pc increase in the number of euro to sterling transactions in the past six months, and an 111pc increase in the number of dollar-to-sterling transactions.

TAKE A BET ON CURRENCY MARKETS

Opening a euro or dollar account leaves you exposed to movements in the currency markets, which can work for or against you. But losses and gains are limited: provided your bank remains solvent, the money deposited is safe, although its value may fluctuate.

Those who want to take a more aggressive position on currency markets can do so via spread betting or "contracts for difference". For currency trades, most private investors use spread betting, as there is no capital gains tax to pay on profits.

Spread betting allows you to take a stake on future price movements, be it in currencies, stock markets, bond prices or even sports results.

A firm such as City Index will give a spread bet price on a currency market, such as the sterling/dollar pair of $1.5040-$1.5043. If you thought that the sterling/dollar rate would increase, you would buy the spread price, or if you believed that the sterling would weaken, you could place a sell bet. These are "pound per point" bets, so if you place a buy bet with a stake of £2, you will make £2 for every point the pound rises above your entry level.

If the market moves against you, you will pay £2 for every point it moves in the wrong direction. The spread price will track the underlying exchange price of the sterling/dollar currency pair. Given the volatility of currency markets, it is not hard to see how people can ether make money quickly or owe significant sums.

These are also leveraged bets, as investors only put down a "margin trade", which may be just 1pc of their exposed position. This can mean bigger gains, but also magnified losses.

But spread betting isn't just used to speculate. It can also be used as a hedging tool to protect investors against currency markets moving against them. Joshua Raymond of City Index says: "If you were looking to buy a house in Spain for €300,000 and money was due to transfer on April 1, this would cost you about £271,500 at today's exchange rate.

But if the pound weakens over the next month – say it goes back to be worth just €1.0250 again – this investor will have to find an extra £21,189 to complete the deal.

"To combat this, you can make an FX spread bet to cover this difference," Mr Raymond said.

If you take a short position on the pound, any profits made should cover the extra payments due on the euro mortgage deal. If the market moves against you and the pound rises, you have lost money on the spread bet, but will need less money to complete the housing transaction.

For the full story visit  www.telegraph.co.uk

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