Ten ways to cash in on a strong pound

Some currency strategists forecast the pound will remain above $2 for the summer and could go higher. Barclays Capital predicts the pound will reach $2.25 over the next one to two years.

Sterling's strength is not all good news. It is taking its toll on the competitiveness of some UK companies and dividends. For those with a US holiday home, a depreciating dollar has accentuated falling house prices.

Here we explain how you can protect your investments and cash in on the pound's strength.

1 Prepaid cards

These enable holidaymakers to prebuy their holiday spending at a time when the currency markets are in their favour.

The Travelex Cash Passport card can be loaded up with sterling, dollars or euros. Once abroad, it can be used like any bank card with a Pin. Purchases in shops incur no charge, but users pay $4.50 (£2.25) to withdraw cash at ATMs in the US.

There is no entry fee, but if you don't use the card for 12 months you are charged $3.50.

Users have to load a minimum of $200 on to the card, up to a maximum of $9,000.

If lost or stolen, the money remaining on the card is guaranteed and a replacement will be sent out in in a few days.

2 Forex deals

Many foreign-exchange brokers offer forward contracts that allow you to lock into a favourable rate now, even if you don't need the money for many months.

Last week, broker HIFX was offering an exchange rate of $2 on £200,000 in one year's time. You would have to put down a 10 per cent deposit of £20,000 now, with the remaining £180,000 balance due in 12 months.

Now may not be the best time to lock into a forward contract if you think the pound will go even higher, but plenty of forecasters take a contrary view.

3 Currency trading

City institutions such as pension funds try to make money by trading currencies. Until now, it has been hard for private investors to do the same, but now a scheme run by City Index Advisory will manage a trading portfolio in four currencies: dollars, euros, Swiss francs and yen.

It aims to make 20 per cent a year, although it is high risk. The minimum investment is £25,000.

4 Buy US shares

Some analysts think that now could be one of the best times in decades for British investors to buy into the American stock market.

Fund managers have become positive about the US, despite fears of a slowdown and a mortgage meltdown, on hopes that interest rates have peaked.

The weaker dollar will give American company profits a further boost because it makes exports look better value.

Those who want to benefit should look at a fund such as M&G American or UBS US Equity.

But if you already hold American funds or shares, now is not the time to bring the money back into Britain because your profits will be worth less when converted.

5 Overseas homes

Your pound will go further when it is converted into dollars, meaning you can buy a bigger second home. But the unsettled US housing market is putting off many potential buyers. There are alternative opportunities in places such as the Caribbean and Dubai where the currencies are linked to the dollar and so have weakened in sympathy.

Miranda John at Savills Private Finance said: "The more adventurous could even consider emerging markets like Thai-land, Brazil and Argentina where currencies are all dollar-linked."

6 Invest in gold

Gold is one of the asset classes that traditionally benefits from a weak dollar because it is seen as an alternative store of value.

The easiest way to benefit is to buy Lyxor Gold Bullion Securities, traded on the London Stock Exchange. These are shares that track the gold price. Each share represents a tenth of a troy ounce of gold. On Friday gold bullion cost $649 and one share was worth $64.

For a longer-term punt try the Perth Mint of Western Australia where you can buy bullion. It is owned by the Australian government and has low costs, with no holding fees.

7 Move into dollar spenders

Investors could move into British stocks that pay for goods or services in dollars, which will benefit from the greenback's decline because they are getting more for their money.

Morgan Stanley tips satellite broadcaster BSkyB and Next, the retailer, which buys from Asian countries with currencies linked to the dollar and is well placed to weather the storm on the British high street.

8 Move out of dollar buyers

However, British companies that do a large portion of their business in America or regions closely tied to the dollar have been hit.

The strong pound has reduced their profits when converted back into sterling and affected their competitiveness in the US and other dollar-linked regions, especially Asia.

Arm Holdings, a technology firm which does most of its business in dollars, said recently that the greenback's decline had wiped £1 billion from its stock-market value.

Other stocks that make most of their profits in America include Shire, the drugs company; Amvescap, the investment group; Carnival, the cruise operator; and Pearson, the publisher.

Many large British companies such as BP, HSBC and Glaxo Smith Kline also pay their dividends in dollars.

Investors have been warned that this year they may see no increase in their payments after they have been converted back into sterling.

Analysts say, however, that investors need not worry too much because companies that do a lot of business in the US often hedge their exposure to overseas markets.

9 Spread bet

Spread-betting firms, which let investors gamble on currency movements, say some clients have made hundreds of thousands of pounds betting on the dollar drubbing.

However, it is not for the fainthearted because you can lose more than your stake. There is no stamp duty and profits are free from capital-gains tax, but you cannot set losses against tax.

Ladbrokes, the high-street betting shop chain, offers less risky fixed-odds betting on foreign exchange on its website, ladbrokes.com.

10 Shop on Fifth Avenue

A year ago the exchange rate for tourists visiting the US was $1.85 and in 2001 £1 was worth just $1.40. That means prices in America are in effect 9 per cent lower than 12 months ago and 45 per cent lower than in 2001 for sterling buyers.

You can shop on US websites, but once shipping costs, import duty and Vat are factored in the savings are often small.