Why is sterling on the slide?

Why the rapid slide in sterling these days? Is it connected to the dollar somehow? I'm sure it has something to do with the credit crunch etc but what exactly?
Thanks

The BoE firstly, completely lack credibility over Northern Rock, and secondly the MPC of Blanchflower et al completely lack credibility on their commitee meetings to set monetary policy. Instead of the MPC, straw polls amongst VI City bankers and media should be used instead. The MPC now lacks all authority within the City, money markets failed to react to any interest rate cut with inter bank rates or Libor margins, widening further.

In short the UK are maxed out on credit, it's the highest amongst G7 debt. Consumers are maxed out, house price growth and mortgage equity withdrawal are history. Corporate finance is failing due to the credit crunch and inflation is rising. To compound inflationary problems, the City widely believes another three interest rate cuts are on the cards during 2008. Money markets are reacting to all this. BoE can no longer maintain a credit boom and similair to the States, UK plc will enter recession by September. America has already entered recession with a second month of 0% growth. The UK time lags by nine months only.

Does this analysis mean it is too late to transfer any surplus sterling into Euro or other currencies to balance out the weakening of the pound? For example I was planning to give cash gifts to a number of nieces and nephews living in Ireland. Is this a good time to buy Euro for sterling cash or should I do something completely different? I'm not too clear on currency exchange matters and it seems to me that if at the moment a Euro = 73pence that isn't a good exchange position

Marie said:

Does this analysis mean it is too late to transfer any surplus sterling into Euro or other currencies to balance out the weakening of the pound...at the moment a Euro = 73pence that isn't a good exchange position

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Marie - the market rate is £0.7541 at close of business. By the time you buy an exchange rate from the banks a spread of .75 base points will be added on. The conversion rate is absolutely abysmal. For nephews and nieces I would suggest putting excess monies for them into a post office saving account which offers competitive saving rates, until matters improve. Short term, sterling may devalue further with UK interest rates widely expected to be cut again at the start of February.

I too am caught in the cross fire with large sterling reserves that need swapped over to euros. But my target price with the money trader is 70p, whenever that materialises. Not for a while though I guess?

I agree with you, MichaelDes, any central bank which effectively says it will bail out profligate credit policies, is just saying it is prepared to print money. This sterling slide stems almost totally from the NR situation or rather the malaise that caused that situation, the other aspects such as anticipated future rate cuts are just a consequence of that.

MichaelDes said:

Marie - the market rate is £0.7541 at close of business.

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Close of business on an FX rate during the middle of the week? The GBP/EUR market is still open and being traded as we speak.

Bluetonic said:

Close of business on an FX rate during the middle of the week? The GBP/EUR market is still open and being traded as we speak.

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Completely right. Just because I'm at home doing sod all, doesn't mean the markets are too. 24/7.

Ye i had 8k sterling, if i had of exchanged it in August like i was going to i would of got around 11.5keuro, when i exchanged it last week i got 10,650, thats a grand less. But i dont mind as im not prepared to sit and watch the sterling drop anymore.

On the other hand, ill be going to buy a car in the UK later this year so hope it continues to devalue for now

Thanks for the replies, not good reading.....
My husband is paid in sterling and is due a large sum soon and also at the end of the year so we were thinking of perhaps opening a sterling deposit a/c in the UK and waiting it out, but as it may indeed get worse, goodness knows what's the best course of action......

MelF said:

Thanks for the replies, not good reading.....
My husband is paid in sterling and is due a large sum soon and also at the end of the year so we were thinking of perhaps opening a sterling deposit a/c in the UK and waiting it out, but as it may indeed get worse, goodness knows what's the best course of action......

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The best course of action is to hedge against the fx risk if you intend converting the sterling to euro. You can do this in the spot fx market or by using fx forwards or fx options. Your husband really should get professional advice re fx exposure if he regularly receives large sterling sums.

Yes! Bad news for those planning to resettle in Ireland and watching the adjustment in property-values with growing hope. The exchange-rate shift puts the kybosh on affordability of that little retirement cottage in the Whest

The slide of sterling, like the slide of the dollar and the rise of the euro are due to very simple supply and demand economics.

Traditionally, many developing countries in the world kept foreign currency reserves of dollars and/or sterling. This is because for a lot of these countries, their own currencies are week or unstable. This created a demand for dollars and sterling beyond US & UK domestic use. Where there is demand for something, the price goes up. So the price of the dollar and sterling has been high for past decades due to this demand.

Obviously, on the date of the launch of the Euro, no country in the world had Euro reserves as the Euro did not previously exist. Once the Euro got bedded in and proven to be a very stable major developed economy currency, the aforementioned developing countries decided that it would be prudent to keep a large proportion of their foreign currency reserves in Euro. So recently they have started to sell their dollars and sterling and buy Euro. This has causes a glut of dollars and sterling on the world markets - thus the price decreases. And the extra demand for Euro has caused the price of the Euro to rise.

There is no reason to suspect that this trend will not continue for the foreseeable future as confidence in the Euro is still rising. Long term, sterling may end up being the biggest loser as some of these countries will decide to stay with only 2 main foreign currencies - Euro and dollars - and not bother with sterling which has been relegated by the Euro. Many of these countries are talking about heading for a 50:50 dollar to Euro ratio in their main reserves.

In addition to the above, the UK has the problem that they are an EU country that is not trading in the EU currency - the Euro. This erodes their competitive in the internal EU market as exchange rate risks and costs have to be built into the price of all UK goods.

In short, the future of sterling is not looking good.

Following that idea to its logical conclusion if/when 'weak' sterling sucks in bargain-hunters (AAM posts already reflect folks will visit UK to benefit from the extra bangs they can now get per Euro) combined with the increased affordability of UK exports would sterling strengthen again? Or to put it another way - how bad is it? Could the slide be plugged easily by an increase in trading or sterling-buying........or is the UK doomed! doomed!