The Wall Street Journal-20080111-Pound Is Brought Back to Earth- Sterling- Like the Dollar- Descends Amid a Basket Of Economic Problems
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Pound Is Brought Back to Earth; Sterling, Like the Dollar, Descends Amid a Basket Of Economic Problems
In a sign that the U.S. economic malaise is spreading to Britain, the pound is fast becoming one of the world's least-loved currencies.
Investors have taken such a dislike to the pound in recent weeks that it's starting to live up to its nickname among currency traders: the European dollar.
Since touching a 26-year high against the U.S. dollar in early November, the pound has lost 7% of its value against the dollar and nearly 8% versus the euro. Late yesterday in New York, one pound traded at $1.963. One euro fetched $1.48, up from $1.4668 Wednesday and slightly less than the record set in late November, when it briefly bought $1.4967.
The pound is suffering because the woes of the British economy look increasingly similar to those facing the U.S., including a deflating housing market, pressures on financial institutions and weaker consumer spending.
The pound's travails point to a larger phenomenon in financial markets, where investors are increasingly dividing economies into two camps: those drawn into the U.S. vortex and those that remain somewhat resilient. Britain and Canada fall into the first category, and the currencies of both countries have weakened against the dollar in the new year.
"The U.S. dollar is still suffering, but the Canadian dollar and the pound have actually suffered more," says Lisa Scott-Smith, managing director at Millennium Global Investments, a London asset manager. Since touching a modern-day high in November, the Canadian dollar has weakened nearly 10% against the dollar.
Economists believe Britain's central bank will be forced to lower its key interest rate to spur growth. Yesterday, the Bank of England left that rate unchanged at 5.5%, but investors expect a cut next month.
The United Kingdom has "a mild form of the U.S. disease, it turns out," says Mark Farrington, head of currency at Principal Global Investors in London. "If this toxic mix of leverage, stagnant incomes and falling asset prices continues to print bad news over the next six months . . . you can be sure the sterling is going to fall a lot further."
Mr. Farrington says his company was one of those betting against the pound in the past quarter. He expects further declines in the currency, although perhaps not immediately.
Economists expect that the Bank of England could lower its key rate by as much as a full percentage point over the course of this year. The U.K. economy has taken a bad knock from the credit crunch; its large financial sector is suffering, and tougher borrowing conditions are hurting the consumer.
Free-spending Britons have helped the economy outperform its European peers for more than a decade, but many U.K. retailers have reported their worst Christmas season in three years.
British consumers had been encouraged by the availability of easy credit as the value of their homes galloped higher. Now the opposite is true. Over the past three months, housing prices have fallen 0.8% on average, according to U.K. bank Halifax, a division of Bank of Scotland PLC. It was the first such decline in about three years.
Britain's housing troubles are likely to worsen, as certain mortgage costs are set to leap. Britain's market regulator, the Financial Services Authority, predicts that at least 1.4 million mortgages originated at low rates will reset higher this year.
These troubles are kicking in just as sterling (known as "cable" in currency-trading lingo) floats at historically high levels versus the U.S. dollar. Over the past 30 years, one pound has been worth, on average, $1.72, according to Barclays Capital, far less than its current value.
That combination of factors has left the British currency particularly susceptible to a tumble. What's more, the pound "has a history of, let's call them 'lively,' retreats," says Simon Derrick, the London-based chief currency strategist at Bank of New York Mellon.
Another sign of the pound's vulnerability can be seen in the convictions of currency traders. Yesterday, Goldman Sachs reiterated that betting against sterling is one of its global-markets group's top 10 trades for 2008. Goldman is wagering that the pound will weaken versus the Japanese yen in particular. That's because the yen is a currency that tends to strengthen in times of volatility.
Sterling's decline could be a mixed blessing for the U.K. economy. Imported goods will become more expensive, possibly adding to inflation and so complicating calculations for the central bank, which will want to cut rates to stimulate the economy. But a weaker pound could be a boon for British exporters.
After trying to break into the U.S. market for 40 years, Lindisfarne Ltd., a small producer of fortified wine in northern England, succeeded in 2006. At that point, the pound was steadily strengthening, making its product more expensive for customers outside Britain. Now that the pound has started falling, the company has seen an increase in inquiries from around the world.
The dollar fell sharply versus the euro after comments from top central bankers convinced investors that interest rates could fall in the U.S. but rise in the euro zone. Against the yen, the dollar was at 109.47 from 109.87. The euro was at 162.01 yen from 161.15 yen. The dollar was quoted at 1.1040 Swiss francs from 1.1157 francs.
