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Sterling breaks $1.60 barrier

Yesterday the pound strengthened to $1.60 for the first time since November last year. This follows the pound sinking to $1.36 in January, which was the lowest level for over twenty years.

 

Why did sterling rise? The dollar is normally seen as a sanctuary in times of global turmoil but there has been some sentiment in the markets that the UK economy has come through the worst of the downturn. This has made some investors move out of dollars and into sterling.

 

However, there may be a limit on sterling rising much further, due to the continuing need to finance record levels of government borrowing, especially as April’s borrowing reached a record of £8.5bn.

The pound has been appreciating against the dollar

The pound has been appreciating against the dollar

 

Philip Manduca, who is Head of Investment for the ECU group, said that: “I can’t find anyone who truly believes that there are not more problems ahead in the UK. Increasing government debt can only lead to higher taxes and a subdued economy for years to come, which does not make for a prosperous future. How is the UK Government going to finance itself?”

 

The uncertainties regarding higher government borrowing, the printing of money by the Bank of England and the possible inflationary consequences, are likely to keep sterling relatively depressed in the months ahead. A higher sterling exchange rate will make imports cheaper but a lower rate will boost our exports.

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Posted in Bank of England, Exchange Rates, government borrowing, sterling

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