Who's afraid of the depreciating dollar?

The City may be primed for a round of bumper bonuses, but with the pound nudging US$2, the continuing weakness of the greenback remains bad news for UK bankers who have their bonuses calculated in the currency.

While the US dollar has strengthened against the euro since the start of the year, it remains weak against sterling. After starting the year at US$1.7, it's currently at about US$1.9. This is not insignificant when you take into account that the vast majority of bulge-bracket banks, and certainly US houses, determine their bonuses in dollars and then change them into local currencies.

Yet, although the dollar has been weak on and off for past couple of years, it's not seen as a particularly serious issue in senior banking circles, argues Jon Terry, a compensation and benefits specialist at PricewaterhouseCoopers.

"It is just something they have to accept," he says.

Nevertheless, he says it's becoming more common for banks to determine and convert bonuses on a monthly basis, meaning currency fluctuations get averaged out over the year.

"There are a very small number of banks that also offer hedging opportunities for their employees, but it is not a common practice. I only know of two that do it," says Terry.

The bigger question is the size of the bonus rather than what currency it is in, he points out.

"Currency is an issue, but when your absolute mound is up 25% that somewhat offsets it," he points out. "It is more of an issue in a tough year."

"No one has mentioned the exchange rate this year," agrees Matthew Osborne, managing partner at Armstrong International. "The fact that no one is talking about is a reflection of how bullish the market is - people don't care if the rate is US$1.8 or US$1.7 because they think they're going to be paid up anyway."