Tweet
The government yesterday ruled out any intervention in the money markets to halt the slide of the pound, as analysts predicted that sterling would soon hit parity with the euro.
Amid expectations that the deepening economic crisis in the UK would drive the pound lower, ministers were stressing that inflation rather than the currency was at the heart of government policy.
The pound has dropped 22% against the euro over the last year to hit an all-time low of €1.12 and its decline has accelerated in recent days, prompting talk that the country could face a full-blown currency crisis.
Yvette Cooper, chief secretary to the Treasury, defended the government's policy yesterday. "We've never had a policy of targeting the pound. Our policy is to target inflation. And that I think has been the right one," she told the BBC's Andrew Marr programme.
"If we don't step in to support the economy now and help people through this, it will cost us more in the future because we will see a recession which lasts longer, which runs deeper, which keeps unemployment higher for longer," she added.
As well as falling against the euro, sterling has also shed 25% of its value against the dollar this year.
While on the money markets the uncharted territory of parity is yet to be reached, in the high street the crucial level has already been smashed. Currency Exchange in Oxford Street, London, was selling euros for as little as €1.0532 to the pound.
Martin Slaney, head of derivatives at GFT Global Markets, said the pound was now likely to hit parity with the euro and may fall even further as the economic troubles continue.
"The 12-month outlook is pretty bleak for the pound," he said. "The euro is becoming the darling of the currency market and there's no confidence in the pound and I would not be at all surprised if it hit parity with the euro and even fell a bit below that."
The shadow chief secretary to the Treasury, Philip Hammond, said: "The government says it will not 'step in' as the pound slides to parity with the euro, but it is this government's reckless intervention which has caused the pound's weakness.
"Gordon Brown's huge borrowing programme which has been ridiculed by the Germans and cautioned against by the IMF and the European Central Bank has now been firmly rejected by the markets, which have responded to Brown's economic policies by dumping sterling."
The Labour and Conservative governments have been wary of intervening in the pound ever since the hedge fund legend George Soros pushed sterling out of the ERM.
"You will recall that previous attempts to target exchange rates - for instance through the exchange rate mechanism - were not successful and caused all kinds of problems," Cooper said.
"Of course it is the case that there is volatility on the currency markets, which reflects the uncertainty in the world economy. Nevertheless, I think we are plotting the course ... to support jobs and to help us come through this."
Discussion about whether hedge funds and other major speculators were behind sterling's fall has again dominated the market. Nick Parsons, head of market strategy at NAB, said: "This is not a speculative attack on the pound driven by the usual suspects. It's not that. There is very little volume going through and no mass building up of positions."
But few dispute that there are profits to be made. Nick Fullerton, managing director, of FC Exchange, said: "People will be betting against sterling. When there is so much volatility there is money to be made."
But he believes that hitting parity is a tall order and that a more crucial level of €1.10 - the equivalent of sterling's low againt the mark - will need to be breached first.
guardian.co.uk © Guardian News & Media Limited 2008 | Use of this content is subject to our Terms & Conditions | More Feeds
More...
