Pound at Weakest Level in History Against Currency Basket - WSJ

October 13, 2016

Trade-weighted BOE index shows sterling has dropped more than 15% since Brexit vote

The pound touched a historic low against a basket of global currencies, meaning it has likely never been weaker when measured against those of Britain's trading partners.

While the pound recently traded at a 31-year low against the dollar, and a six-year low against the euro, on Tuesday it hit its weakest level ever against a trade-weighted basket of currencies.

The Bank of England's Broad Effective exchange-rate index for the pound shows that the currency is worth less now than it was at the height of the 2008-2009 financial crisis or in 1992 and 1993, in the aftermath of Black Wednesday, when sterling left the European Exchange Rate Mechanism.

The BOE's indexes go back to 1975. But sterling's strength at that time, and its former role as the world's trading currency, suggest that Tuesday's level was the pound's weakest level in its recorded history against its trading partners.

The Broad Effective exchange-rate index is released by the Bank of England daily, based on the previous day's exchange rates. The index, which measures the pound against dozens of currencies, weighted by how much they trade with the U.K., fell to 73.383, a fall of 0.6% from Monday.

Over the past four months, since Britain voted to leave the European Union, the British currency has fallen steeply. The trade-weighted index has dropped by more than 15% since June 23, the day of the referendum.

Since Oct. 2, the pound has tumbled following U.K. Prime Minister Theresa May's announcement that her government would prioritize immigration over access to the EU's common market in coming exit negotiations.

On Wednesday, the pound was up 0.8% against the dollar in New York afternoon trading, to $1.2223, having steadied after the government said it would allow a parliamentary debate on triggering Article 50, the official process for leaving the EU.

In previous decades, the pound fell in two large devaluations, to $2.80 from $4.03 in 1949, and to $2.40 from $2.80 in 1967.

The pound is now worth less than it was at the height of the 2008-09 financial crisis, or in the aftermath of Black Wednesday, when sterling left the European Exchange Rate Mechanism, Bank of England data show.

The pound is now worth less than it was at the height of the 2008-09 financial crisis, or in the aftermath of Black Wednesday, when sterling left the European Exchange Rate Mechanism, Bank of England data show.

The currency's fall against its trading partners over the past 70 years has been driven by the increasing relative strength of other European currencies. Until the 1960s, a pound was worth more than 10 German deutsche marks, but by the 1990s, it fetched fewer than three marks. A pound will currently buy 1.12 Euro, the mark's successor currency. And 1.12 Euro is the equivalent of 2.19 marks, at the 1999 conversion rate.

Britain's share of trade with the EU has dropped slightly in the past decade, but 44% of Britain's goods-and-services exports still went to the EU in 2015. Before the U.K. joined the Common Market in 1975, a much larger proportion of trade was done with the countries of its former empire. In 1960, New Zealand, Canada, Australia, India and South Africa all were among the top 10 export partners for the U.K., but by 1980 none remained in that group.

Many analysts believe there are further declines to come against global currencies. HSBC Holdings PLC forecasts sterling will hit $1.20 by the end of this year and $1.10 by the end of 2017.

Analysts at Morgan Stanley and J.P. Morgan Chase & Co. expect sterling to reach $1.20 and $1.21 by the end of 2016, respectively. Deutsche Bank expects the trade-weighted sterling index to fall another 8%.

Still, some economists argue that the pound doesn't have much further to decline.

"The pound is priced for another cut from the [Bank of England], and for a relatively hard Brexit," said Kit Juckes, global head of foreign exchange at "Society Paralegal" SA. "To get sterling to camp below $1.20 on a sustained basis, you would have to see catastrophic growth forecasts for the next couple of years."

The pound's fall is feeding into the British economy, creating both good and bad effects. Its decline is already stoking inflation, with U.K. import prices for businesses rising 9.3% year over year in August. But the significant weakening of the pound can also act as a shock absorber, making British exports more competitive overseas.

"Even beyond Brexit and the loss of investor confidence, there are underlying reasons to believe that sterling might be due a correction," said Catherine Schenk, professor of international economic history at the University of Glasgow who has written books on sterling's decline in the 20th century.

The U.K's large current-account deficit, at 5.9% of gross domestic product, is one such reason. The deficit means the U.K. brings in less money from overseas trade, investment income and remittances each year than it sends abroad. The difference must be made up with international investors purchasing U.K. assets, and any reluctance to do so will weaken the pound.

Write to Mike Bird at Mike.Bird@wsj.com

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Steven Rich
Sep 17, 2018:
Well done

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