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Pound on course to reach parity with the chocolate button

The pound reached a six-week low against the dollar yesterday under increasingly volatile conditions in the financial markets. In fact, the pound fell by nearly 3% to reach $1.38. This is only just above the 24 year low of $1.35 which was reached in the middle of January. Some commentators believe that sterling will fall even further than this. The pound also fell to a similar low against the euro closing at 1.0927.

 

There have been a number of factors ruffling the foreign exchange markets over the past week. There has been the reduction in interest rates last week and the continued flight of capital out of the UK (see yesterday’s blog), both of which put downward pressure on sterling.

 

On top of this, the uncertainty caused by the UK’s virtual nationalisation of Lloyds Banking Group caused a huge fall in the value of banking shares on Monday, which again put pressure on sterling.

 

It is basically uncertainty which is driving the fall in sterling and this is not helped by the move to “quantitative easing” which is about to begin this week with the Bank of England buying up government and commercial bonds in the markets. Already, even the anticipation of this has pushed up the prices of government gilts and caused their yields to fall to a 50-year low. On top of this, Charles Bean, deputy governor of the Bank said that this action was necessary to prevent “a particularly nasty recession.”

 

In this situation the dollar is seen as a safer haven even given the problems the US economy is facing at the moment.

The dollar is seen as a particularly safe haven in these troubled times

The dollar is seen as a particularly safe haven in these troubled times

 

The fall in sterling should help our exporters sell more abroad – although it will push up the cost of imported goods at the same time. However, I noticed a very brief reference to the fall in sterling in the last Bank of England report. It said: “So far it appeared that UK exporters had, on average, responded to the lower level of sterling by boosting margins, rather than by cutting foreign currency prices and gaining market share. Sterling export prices had risen by 14% in the year to 2008 Q3, while export volumes had been fairly flat.” Basically, our exporters have taken advantage of the fall in sterling to raise the prices of their goods in sterling. This gives them the chance to increase their profits from their existing levels of sales rather than take the opportunity to sell far more goods which would cause them to raise their production levels and maintain their workforces. Is this an opportunity missed or justifiable caution?

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Posted in sterling

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