Tweet
The world's foreign exchanges were today readying themselves for parity between sterling and the euro after further selling sent the pound to within touching distance of a one-for-one exchange rate against the European currency.
Fears of a severe UK recession in 2009, the weakness of the dollar prompted by the Israeli attacks on Gaza and thin post-Christmas trading all contributed to a 2% fall in the pound yesterday. At its lowest point this morning the pound was worth €1.0265, slightly up on the previous day's low of €1.0198.
The euro has risen by almost a third against the pound in the course of 2008, with an 18% appreciation in December alone. Sterling's trade-weighted index against a basket of currencies fell to 74.2% of its 2005 value, its lowest since the Bank of England first kept daily records in 1990.
Although the cheaper pound makes UK exports more competitive on world markets and encourages foreign visitors to Britain, it also means dearer imports and makes overseas travel more expensive.
Financial markets believe that UK interest rates - already at a record-equalling low of 2% - will be cut further in the new year as the Bank seeks to revive an economy that is on course to suffer its weakest year since the early 1980s.
Figures released yesterday added to the gloom about the UK's immediate prospects, with the property consultants Hometrack reporting a 0.9% drop in house prices in December, the Chartered Institute of Personnel and Development forecasting that 600,000 jobs would be lost in 2009, and the expected appointment of administrators at the childrenswear retailer Adams fuelling speculation there would be a wave of new year collapses in the retail sector.
"Sterling is continuing to be hit by the belief that rates in the UK still have to fall much more, and underlying fears of a very deep recession in the UK," said Antje Präfcke, currency strategist at CBCM in Frankfurt. "There's still a gravitational pull towards parity [with the euro] in the thin market."
The pound's fall has coincided with an aggressive succession of interest rate cuts from the Bank, which has reduced the official cost of borrowing from 5% to 2% since early October. Markets also believe Threadneedle Street may follow the Federal Reserve, the US's central bank, and intervene to bring down long-term rates.
"There's a sense that UK rates will fall closer to zero, and that the Bank may be forced into some sort of quantitative easing, while there's no sense of that in the eurozone," said Daragh Maher, senior currency strategist at Calyon in London.
He added that the negative view of the UK economy would continue to weigh on the pound, although additional weakness in the eurozone economies may start to chip away at the euro's appeal.
Higher interest rates in the eurozone have increased the euro's appeal against the pound as it has narrowed the yield spread between eurozone and UK government bonds. The yield on 10-year UK bonds hovered around 3.121% on Monday, near a record low of 3.008% hit last week, while the yield on its eurozone counterpart fell to an all-time low of 2.909%.
George Osborne, the shadow chancellor, said: "As Gordon Brown himself says, a weak currency is a reflection of a weak economy and a weak government. Labour is bankrupting Britain again and the rest of the world knows it."
guardian.co.uk © Guardian News & Media Limited 2008 | Use of this content is subject to our Terms & Conditions | More Feeds
More...
