The pound has tumbled to a one year low against the dollar today. The pounds slide has been pretty staggering; we have seen GBP/USD fall from $1.65 to the current rate of $1.5350. Why?
The collapse is a result of several factors. First, sterling is fundamentally an immensely unappealing currency. The MPC last month voted in its entirety for a hold to the record low Bank of England interest rate of 0.5%, meaning the two remaining hawks had abandoned their quest for an interest rate hike. With inflation expected to fall fairly rapidly next year, and with UK growth clearly on a downtrend, the market has given any hopes of a higher UK interest rate. The recent MPC minutes reveal that they are very close indeed to pulling the trigger on introducing further quantitative easing.
Second, the euro/dollar pairing has collapsed. The GBP/USD rate to a large extent tracks the EUR/USD pairing, which has suffered a ten cent collapse in the past month. Concerns surrounding the eurozone debt crisis have finally taken their toll on the single currency with Greece seemingly certain to default at some point and with no long-term solution in sight. The UK’s proximity and exposure to a eurozone debt and a potential Lehman’s-style collapse in the European banking system, has also weighed on sterling and triggered huge euro-dollar flows.
Third, concerns over US and wider global growth have contributed to a hugely ‘risk off’ trading environment. Riskier currencies such as the Canadian, kiwi and Australian dollars are selling off as investors flee to the safety of the dollar. The huge losses in global equities that we are seeing will always benefit safe-havens such as the dollar. The fact that the US economy is in such a fragile state makes little difference, in fact the extent to which the world’s largest economy is struggling only intensifies the safe-haven flows which are benefiting the dollar.
Finally, the dollar is enjoying a greater share of the safe-haven pie. This is because the former safe-haven of choice, the swiss franc, has lost its appeal. The Swiss National Bank has intervened in the currency markets to curb the excessive strength of the swissie, so the market has been scared off. Though it has been unsuccessful in its interventions of late, the Bank of Japan nevertheless looks likely to take similar action to weaken the yen. USD/JPY is at record lows near 76.00, so the Bank of Japan’s patience is certainly being tested.
Do we see sterling making further losses to the dollar? Yes we do. There seems to be little on the horizon to fuel much of a sterling rebound. Contrastingly, fears over global growth look likely to persist. Likewise, the other major concern- the eurozone debt situation, looks unlikely see any significant progress in the near future. The outlook is very positive for the US dollar then, albeit the opposite is true for the US economy.
Richard Driver
Analyst – Caxton FX
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