Tags: pound

Pound Could Plunge on U.K. Weakness

Friday, 12 Sep 2008 08:58 AM

For several years now, the British pound has strengthened against the dollar, leading the U.K. currency to a status as one of the world’s leading reserve currencies, a position the pound hadn’t held since the first half of the 20th century.

But now that enhanced status is in jeopardy.

Recent comments from Britain’s Chancellor of the Exchequer Alistair Darling that the nation faces its biggest slowdown since World War II have some experts forecasting that the pound can drop up to 20 percent.

“We are facing a profound economic downturn along with every other country in the world,” Darling told The Guardian newspaper.

The U.K. currency has risen 12 percent against the dollar over the past five years. But the pound has fallen back 11 percent against the dollar since June 1.

And what’s pushing Britain’s currency down? A vicious housing slump.

Home prices plummeted 12.7 percent in August from a year earlier, the fastest rate of decline in at least 25 years, according to HBOS, the nation's biggest mortgage lender,

As a result, the U.K. economy posted zero growth in the second quarter.

The pound is about 20 percent overvalued, according to International Foreign Exchange Concepts in New York, the world’s biggest currency hedge-fund company, controlling $14.6 billion.

And the Bank of England’s unwillingness to cut interest rates just makes the situation worse, the company’s chief executive, John Taylor, tells Bloomberg.

The pound may be “massively overvalued against the dollar. They're going to have to go for a cut. I don't know who they think they're kidding by holding out," he says.

Taylor isn’t the only expert bearish on the pound.

Stephen Jen, head of global currency research for Morgan Stanley, tells The Wall Street Journal, “Sterling had managed to claim such a high status among investors. I am concerned that this trend may be reversed.”

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For several years now, the British pound has strengthened against the dollar, leading the U.K. currency to a status as one of the world’s leading reserve currencies, a position the pound hadn’t held since the first half of the 20th century. But now that enhanced status is...
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Friday, 12 Sep 2008 08:58 AM
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