Hopefully the Anti-Terror squad will not be around to arrest me for this. But it has to be said, there is a sterling crisis now. Not next year, but now.I Hope no one is planning a holiday abroad. I was in Italy in the summer and the paltry rate then was 1.25 I found the relative costs of meals etc to be the same as in the UK. Now it will feel very expensive to go to Europe indeed.
The Pound may well fall to parity with the Euro and the Dollar in the coming months. IF that came to pass it would really mark a new low never before achieved in history for the UK.
At some point in a Sterling crisis the Bank of England will have to do something; that something is raise rates. However bad the recession and all the economists predictions of 0% rates the reality may well be that we have to hold rates above the Euro-rate and Dollar-rate to defend the Pound.
Why defend the pound you ask? Well, imports, of which we have lots, will become very expensive fueling high inflation, which would necessitate raising rates anyway. The boost to exports from a cheap currency may be welcome, but so far there is not much evidence of this being a boom to the economy. Crucially, for a Government set to borrow billions of pounds, a weak currency will cause a gilts strike as foreigners will demand a huge premium to maintain their investment or will not by the gilts at all; this issue would be negated by a stable currency.
It will be interesting to see the political and economic reaction to this over the coming weeks. below are the 2008 charts for £ vs USD and Euro:
22 comments:
I'm going to New York next week and am really not looking forward to doing quick 'divide by two' calculations in my head, thinking "that's cheap", then remembering the sodding exchange rate.
Spoke to one importer this morning who are closing up after Xmas until the £ vs Dollar improves.
imagine there will be plenty more
Didn't Iceland recently try and defend their currency by whacking rates up to 18%?
Regards - for an interesting and informative blog - plus some link spam.
http://tinyurl.com/6bezcz
I have just had to refund a US client a large number of my employers' dollars. They are not happy.
Either its further free-fall, or the exchange rate controls that I remember from the days of £1 = $2.80
Ask for permission for every import, get your passport stamped for every foreign holiday spending money!
Steven yes, and Russia too have been busy trying to defend their currency too.
It is hard to do, the idea is not to lose control in the first place...once that happens even emergency measures fail in the face of the markets.
...the rate against the dollar has fluctuated to arrive at this point before, much though we might like to feel special by pretending this is all new - approximately £1=$1 in 1985 if I remember correctly...
when you consider the reasons why people have been buying dollars recently (which have been more stick than carrot, in terms of covering short positions in the dollar)... and why they would hold euros (a belief that the rates there will stay high due to stubbornness of the ECB, which is fine for currency holders but not necessarily for the Eurozone countries)... it's pretty clear that there is no big or unique conspiracy against the pound...
we'd be where the dollar is now if people had shorted the pound to buy investments in other countries and the currencies of other countries, as they did with the dollar...
there was an interesting article in the FT about the current problems of Sony and the advantage Samsung currently holds in the TV wars (not to mention the fact that Sony LCD TVs actually are Samsung TVs with a different badge on) - Sony working in a strong currency and Samsung working in the won which has fallen hard...
I seem to remember a previous occasion when the "authorities" tried to defend an exchange rate by raising interest rates.
10% in the morning, 12% at 2pm, 15% at 4pm, was it not?
And then the next day it was back to 8% and bugger the exchange rate.
It doesn't work, you know. Maggie was right, you really can't buck the market. If enough people think the UK is a basket case, it's probably because it IS a basket case.
We need to take our medicine, pay our debts, stop wasting so much money on useless non-productive things, and get back to work making things people want to buy.
There really is no other way.
Sammy, 1.05 was the lowest ever rate for a single day in 1985. Therefore parity WOULD be new. Not to say you are not broadly accurate in your piece. But this technicality is the importnant one.
There is a conspiracy against the pound - The Labour Government.
Anon - when the end comes in the currency markets there is nothing you can really do in our position. I quite agree, Russia is blowing billions supporting its currency to no good end right now.
Hence the suggestion that remedial action is taken beforehand; the currency reflects the view of what will happen to the country's economic and fiscal position. At the moment it is a one way view...
Seriously, have we ever been in such a state?
I reckon a more natural bank rate would be 5%, I expect to see it climbing up to this level quite soon.
I remember $ 1.05/£ well: the bid-offer got tighter and tighter as no-one wanted to be the first to quote 1.00
it bounced pretty sharpish, too: 1.05 in Feb, but 1.40 by July
those were the days, lads, I can tell you, when Prime Ministers were women, the Royal Navy ruled the South Atlantic and you could buy a pint of wallop for, err ...
*sits on sandbag, swings lamp*
I told a client I would accept Euros today.
Friend's wedding in Texas come march. He better be bloody grateful.
Defend the pound? You can't buck the market, as a good prime minister once said. Long term it will be our best medicine as we will import less, export more and learn to live within our means. Exchange rates are not some kind of virility test; they reflect the state of our economy. Whacking up interest rates will just put us further into the shit.
Sebastian. What I want to do is manage the economy so that we get out of the sterling crisis.
All this you can't buck the markets is not the point. You can't buck them in the end game. The trick is to alter course BEFORE you are in the creek.
Hence my suggestion. On current form we will have quite high inflation next year - real inflation not the silly RPI measued stuff - because imports will cause it as will printing money.
When I talk about whacking up interest rates I mean not lowering them to 0! nbot putting them up to 6% or something
CU,
The tit who thinks he saved the world has an election upcoming.
He needs results NOW.
In the effort to attain immediate sheeple-discernible results he is prepared to commit economic mayhem and national suicide, and screw the consequences.
We are where we are, several parsecs up the creek.
We can argue the cause, argue the remedies, they DO NOT apply in tits world.
Get used to it!
But seek to profit from it.
Actually it is NOT a sterling crisis, for the simple reason that most non-currency prices are actually falling FASTER than sterling. This isn't what normally happens with a currency crisis - with a currency crisis commodities usually become far more expensive relative to the £.
So we have an interesting situation where our imports are getting no more expensive but our exports are FAR cheaper. This would provide us with precisely the tools we need to dig ourselves out of this mess (at the expense of the rest of Europe, natch). But we need a proper Tory government that understands about doingf business first.
By the way, I have just this week booked my family holiday to the Canaries for next year and it was £100 CHEAPER than last year!
Its a funny old world we are living in right now....
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