What is the Future of the Falling Pound?
The pound has plunged to new lows, largely due to the announcement of severe losses for UK banks, compounded by investor scepticism towards the proposed UK government bail-out.
Sterling fell yesterday to $1.386 against the dollar, £0.9274 against the euro, and reached a record low against the Japanese currency at 127.47 yen. Analysts attribute this to a fall in the value of the Royal Bank of Scotland's shares, which dropped a further 11% on Tuesday following Monday's dramatic 67% collapse. Other UK bank shares also closed down on Tuesday, with Lloyds and Barclays falling 31% and 17%, respectively.
The decline of the pound continues despite the UK government's announcement of a second bail-out. Concern regarding the cost of the proposed scheme has caused investors to anticipate a rise in government debt, and the possible downgrading of Britain's credit rating. However, some economists, including Barclays' analysts, suggest that the UK's proactive approach bodes well for the pound in the long term.
Either way, more change is expected for the pound on Wednesday, when both UK labour market data and minutes from the Bank of England's January 7-8 MPC meeting are released.
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Updated: 22/01/09