Sunday, 20 January 2013

Shedding the Pounds

Sterling has fallen more than 2pc against the dollar and 3pc against the euro already this year, marking a departure from 2012 when it was one of the most stable major currencies. During the Eurozone crisis the pound was a safe haven, but as certainty returns to the Eurozone and political risks of a ‘Brexit’ from the EU mount our currency will be in the firing line.  We could become the next sure fire bet for devaluation particularly if our deficit remains stubbornly high

If  the £ could come under a pressure this year, which would obviously be painful - raising the spectre of high interest rates and inflation.  Also the normal upside of devaluation, increasing exports, looks unlikely as the Eurozone in falling back into recession.

So why should the Pound be under pressure from a currency that is obviously broken?   Well, the main reason is that the markets don't believe this Government have the stomach for deficit reduction - with an election looming in 2 years this flaky coalition don't look like they have the collective will to eradicate our deficit.

This short term issue reminds us that the Pound, a currency around which there is much misguided passion, has performed unbelievably badly against the Euro over long periods.  Even since the Euro imploded we our currency has gone backwards and this points to future problems for the Pound. 

Historical currency exchange rates chart between EUR and GBP in ALL

If the Pound has done badly against the Euro against the benchmark of gold the Pound (along side the Mexican Peso) has performed worse than any other major currency - declining by 83% in the since 2001  (about the time Gordon Brown sold a huge chunk of the UK gold reserves). 

Some of the loonies who are convinced we should withdraw completely from Europe risk a lifetime of currency poverty for the UK as we get caught between gold and the global reserve currencies of the Dollar, the Renminbi and the Euro. 

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