Why sterling faces a pounding
Sterling may have hit a 26-year peak of $2.10 against the dollar last year, but its overall performance was poor.
Against a basket of major trading partners’ currencies, it declined by 6.1%, the worst slide since 1992; against the euro, it has sunk to the lowest level since the single currency’s inception in 1999, while last year saw a 5.1% depreciation against the yen. The pound has also returned to the $2 mark of late.
Why sterling is under pressure
The downtrend looks far from over. With the economy deteriorating, traders reckon the Bank of England will cut interest rates “more aggressively than anticipated” in 2008, said Edmund Conway in The Daily Telegraph. That will reduce the relatively high yield on UK assets.
And matters have hardly been helped by the fact that Britain “shares many of the economic vulnerabilities that have sapped confidence in the dollar”, said Sam Fleming in the Daily Mail.
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Witness the sharp deterioration in the current-account deficit, which jumped to a record £20bn in the third quarter as goods exports slowed and income on foreign investments slid. At 5.7% of GDP, the deficit has eclipsed America’s and is the biggest in the G7. We are “borrowing record amounts” to plug the gap.
This huge gap “is not sustainable”, said Philip Shaw of Investec. Our external position is looking as bad as America’s, suggesting the pound “needs to fall sharply”, like the greenback, said Jonathan Loynes of Capital Economics.
With financial earnings due for a hit amid the credit crunch, the current-account position looks set to widen. Sterling is likely to slide back to the lows of 2006, when it traded below $1.75, according to Graham Turner of GFC Economics. Shopping in America is liable to be considerably pricier next Christmas.
