Sterling at $2 – but for how long?
Great news for shoppers jetting off on holiday: sterling is back over $2. It charged to a new 26-year high above $2.02 against the greenback this week, while it is also at a near-record peak against the euro; analysts are pencilling in further gains against the dollar in the near-term. “Even talk of $2.10 doesn’t sound ridiculous,” reckoned Nils Pratley in The Guardian.
Why sterling’s strong
The dollar has “taken an absolute beating”, said David Bloom of HSBC, amid worries over the fallout from the subprime mortgage sector. High UK interest rates, already the highest in the G7, are giving sterling a boost, as they bolster the yield available on UK assets for foreign investors. Rates are likely to rise further to 6% in the autumn, according to the money markets. These expectations are being underpinned by the UK’s current annual growth rate of 3% and the latest robust survey of manufacturing, while the near-record high in the price of goods leaving factories also points to inflationary pressure.
Money isn’t coming in merely to exploit Britain’s interest rates, however. Record inward investment is another reason for sterling’s strength, and foreigners have snapped up half the shares of FTSE 100 companies, said Hamish McRae in The Independent. Note too that Britain is a more popular destination for Middle Eastern and Russian savings than the US.
Can sterling stay up?
As long as rates remain high and UK assets are fashionable, the pound is likely to remain high. But it “cannot go on forever”, said McRae. The trouble is the UK’s “worryingly large” current-account deficit of 3.5% of GDP, up from 2% in 2005. At some point, “the markets will cease to turn a blind eye to Britain’s tendency to live beyond its means”, said Lary Elliot in The Guardian. Then sterling will have a “long overdue fall”.
