Sterling remained stuck around the $1.39 mark on Thursday, after the heavy toll taken on the pound by Brexit fears this week took it to seven-year lows.
It slipped a further 0.1 per cent in early trade, touching $1.3917, having closed at $1.3926 on Wednesday, when it inched off session lows of $1.3876, it’s weakest level against the dollar since 2009. Compared with highs half a year ago, sterling has dropped 8 per cent against the euro, 9.5 per cent against the US dollar and 17 per cent against the yen.Analysts said its fall is no longer a reflection of the Bank of England’s changed attitude towards interest rates, but the political risk associated with a country contemplating a huge change in its international economic relations. Oliver Jones, of Fathom Consulting, said there were many fundamental reasons for sterling to fall, including Britain’s persistent trade deficit, and the referendum is forcing investors to stop ignoring them. “It may prove to be the key that opens the trap door under sterling,” he said. Sterling’s fall so far is significantly smaller than that in 2007-08 and will raise the price of imports, while allowing exporters either to reduce their foreign currency prices or keep them the same, increasing their profit margins. In the medium term, a depreciating currency should reduce imports because they are less competitive with domestic production and increase exports, although the short term effect can be to increase the trade deficit as Britain takes time to reduce the volumes of imports and simply has to pay more in the immediate future. But, as ever in economics, the effect of sterling’s decline will also reflect its cause, with a concerted loss of faith in the British economy much more serious than a natural decline in the value of the pound. In the medium term, most economists think weaker sterling should stimulate the economy and help it to rebalance towards exports. “The much longed for rebalancing of the economy probably requires a significantly lower exchange rate,” says Vicky Redwood, of Capital Economics. More important than the medium-term effects, however, for business are immediate winners and losers in the corporate sector dependent on whether they are hedged against currency changes, have predominantly foreign revenues or foreign costs. Original story by: Chris Giles, Economics Editor Original story at: http://www.ft.com/cms/s/0/caf3e77e-db0e-11e5-98fd-06d75973fe09.html#axzz4D3TxsRcy
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