Pound Sterling Yen Exchange Rate

Readers Question: I have a question about this entire Economic crisis were in. I have noticed that our currency (UK Sterling) is devaluing against the Yen. I was hoping you could explain why this is happening, and if its likely to happen in the future?

The fall in the value of the Pound against Yen is quite dramatic.

• In July £1 GBP = 216 Yen
• In Nov £1 GBP = 135 Yen.

That’s is a very large depreciation.

Why has Pound Fallen?

• Sharp downturn in UK economy, has led to very sharp cuts in interest rates. Lower UK interest rates mean it less attractive to save in UK banks so demand for sterling has fallen.
• Furthermore, prospects for UK economy keep worsening – see: Industrial Output figures, therefore, markets are now predicting interest rates could fall to 0% – pretty much the same as Japan.
• Unwinding of the global Yen Carry Trade has led to the Yen’s appreciation.

Predictions of Pound Sterling to Yen in 2009

Note: Japan is also in recession. Therefore, the rise in the Yen is causing problems for its exporters. Since Japan relies on exports to drive the economy, the rise in the Yen is coming at an inappropriate time. For this reason, the Japanese would like to stop the appreciation in the Yen.

I would be surprised if the pound continued to fall because I think the foreign exchange markets are probably pricing in UK interest rates falling below 1% – maybe even 0%. Therefore, most of the bad news about the deterioration of the UK economy is priced into the exchange rate. Also since the Japanese economy is in recession too, there seems no chance of Japan seeing any increase in interest rates, in the near future.