Falling Value of Pound Sterling

Why has the Pound Sterling been falling?

Because of the weak dollar, many in the UK have not been aware that the pound has suffered its biggest fall for 15 years. The pound has been strong against the dollar, but, only because the dollar has been very weak. On a trade weighted index, the Pound has fallen by 6.1%. The fall has been most noticeable in the past 6 months. Trade weighted index means the value of the pound is compared against a basked of other currencies. A higher weighting is given to those currencies which form a bigger share of trade. The biggest weighting is therefore given to the Euro.

Reasons for the decline in Pound Sterling include:

• Economic Growth in UK forecast to fall. This means that interest rates are likely to fall. Lower interest rates make the UK a less attractive place to invest hot money flows (get a better return elsewhere)

• Housing Crash. Some predict a fall in house prices like the US. Even if they don’t crash, it is probable they will at least stagnate. Consumer confidence will fall. The housing market is one of the main reasons for the predicted slowdown in the economy.

• Balance of Payments. 2007 has seen a widening of the UK current account deficit. This leads to an an outflow of foreign currency, putting downward pressure on sterling.

• Strength of the Euro. Many are predicting the Euro is taking over the dollar as the world’s dominant currency. This is increasing demand for Euros and causing the Euros strength at expense of other currencies such as the Pound Sterling.

Predictions for Dollar - Pound Sterling

After having reached a peak of $2.10. The Pound has slipped back to $2. On the futures markets the most common prediction for the pound is for it to fall back to $1.80.

• Outlook for Pound Sterling