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Posted August 3rd, 2009 by Jackie

How low will Sterling Go?

The value of Sterling is certainly a subject that has been concerning quite a few Brits – especially those that live overseas or have plans to move abroad. At the beginning of the year Sterling was almost the same value as the Euro (€1=£1) and hovering around US$1.40/£1. Many people watched the value of Sterling, and their overseas purchasing power, decrease by more than 20% over the course of a few months.

When 2009 started, there seemed to be no light at the end of the tunnel as UK banks had to be bailed out en masse. There were concerns that the UK, and perhaps the world, were heading for a rerun of the Great Depression. The government threw a large amount of [our] money at the problem and disaster has been [hopefully] avoided. Additionally, the finance sector took a major knock causing the UK economy and Sterling further problems.

Since the start of the year there has been steady progress for sterling against the € and the US$. There seems to have been two reasons for this – an element of confidence has returned to the finance sector and there has been an appreciation in risk appetite. An increase in confidence has been viewed as positive for Sterling given its close tie to the UK economy. As for the appreciation in risk appetite – this means that people are willing to place their money in riskier assets, such as Sterling, and riskier places, such as the UK.

The UK is not alone in having very significant problems. The US can be viewed as having just as severe problems as the UK and even though a lot of the Euro zone avoided the banking crisis it still had major heartache as exports fell significantly. However, the US$ and the € have major advantages that sterling does not have.

The US$ is viewed as the world’s reserve currency and as such it is viewed as a safe haven in a crisis. It is difficult at first to understand how this could be the case given the problems in the US. The simple reality is that the whole world has huge amounts of US debt and as such can’t afford for the US$ to fail as their assets would become worthless. So it’s a standoff with the whole world not wanting the US$ to loss value.

With regards to the €, the situation is slightly different and comes down to the sheer size of the Euro zone which by default, makes the € a very important currency worldwide. Also the firepower of the € is incredible, especially when compared to Sterling. Just in the last month the Euro zone made available €440 billion as liquidity to cash strapped banks; an amount that dwarfs anything that has been done in the UK.

As noted earlier, since the start of the year we have seen steady progress for Sterling, but one major problem lurking out there is the level of UK debt. We seem to have a government who seems unable to fully understand the extent of the debt problem [or perhaps they just don’t want to admit to the extent of the problem]. This makes it possible that as we don’t recognise or acknowledge these problems and we fail to take the appropriate steps to sort out the mess, we find sterling at the mercy of the markets and in a downward spiral. If this happened we could find sterling back to the same value as the € and close to US$1.40£1 against the US$.

Bearing this worse case scenario, I see sterling holding its own over the next year or so. I don’t think anyone should assume we will see a rate of €1.30/£1 any time soon or perhaps even €1.25/£1. If sterling can stay around €1.15-1.20/£1 for the next few months it will mean stability and some belief in sterling has returned – which makes the downside ever less likely as the UK economy begins to recover.

As to the future value of any currency, no one can predict where the markets are going. At best any prediction would be an educated guess! As such, it’s impossible to determine how low the pound could actually go, but I think there is some comfort in the recent stability that we’re currently experiencing.

Charles Purdy is a Director at Smart Currency Exchange Limited – the international payment specialists. To obtain your FREE reports, move money overseas, including funds for property purchases and also the repatriation of funds back to the UK go to www.SmartCurrencyExchange.com for further information. Or if you prefer, simply telephone us locally on (00 357) 26 030 213.

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