The Weak, Collapsing Pound against the Euro and Dollar.

By | December 30, 2008

As recession bites deeper into the United Kingdom, our usually strong pound has recently been derided as a “Peso Pound” abroad.

At the time of writing, a pound is worth $1-44, One Euro or Forty-One Russian Rubles. A collapse of over 25% in just a few short months.

Anybody with a second home in Europe or the USA, who did not stack ample cash reserves in those currencies already, will already be feeling the pain in the form of increased sterling equivalents when paying their Euro or Dollar denominated mortgages.

Anybody in the Euro zone or the USA who receives income in £ sterling will be similarly reeling, as are holidaymakers and importers. Our pound is now worth peanuts abroad; so what is the government doing about it you might ask?

Grasping Gordon Brown’s government are not too worried about the situation we think. Consider it from their point of view: Anybody with savings in foreign currencies is moving their cash back into sterling right now at happy rates. (Assuming their bank has not gone bankrupt already.) People who fled Gordon’s high tax regime and those with second homes are selling up and coming back to England to ride out the storm – bringing their Euros with them. That’s a lot of extra cash flowing into Gordon inc. to be taxed and a few possible voters for him coming home. [He hopes]

What about industry? You ask. Well as our Peso Pounds are not worth a carrot right now, it makes importing goods much more expensive, so many importers will flounder. However, exporters should flourish, as our products (from what there is left of our manufacturing industry) are now cheap abroad. That is yet more money flowing into the UK that Gordon can steal (shurley tax? – Ed) and waste on crony consultancies, domes, one-legged ethnic minority outreach workers, sofas for Albanians and child benefit for Poles.

If you take frequent foreign holidays, perhaps import a nice car from abroad or maybe enjoy the fruits of your labour by having a second home in France or Spain, then Gordon is not interested in you! His policies will have little appeal to you and as such, you probably don’t vote for him.

He imagines he has a chance of winning the next General Election [yeah sure!] so he must now appeal to the traditional Labour voters, or as some refer to them as: the unemployed, the underclass and the poor. The poor are happy to holiday in Margate enjoying recession discounts with their dole money buying more tubs of lard and packets of crisps from Netto to eat on the coach on the way. They think Gordo is great!

A weak pound means more UK tourism. That’s more people paying airport landing taxes, buying plastic models of Big Ben from Pakistani’s on Oxford Street and more people being fleeced by Black Cab drivers. All these things mean money coming into Britain, which means more money in circulation, which it is hoped would give people confidence to spend. If confidence and spending go hand in hand, we will spend our way out of recession economists’ claim.

However, there is light at the end of the tunnel. The economy is always a cyclical thing, and we have had recessions before. There have been five recessions in the UK since 1960. During four of those, sterling has actually gone up against the euro, (or the Deutsche mark as it was pegged as then). On the one occasion that sterling fell during a recession – in 1973-74 – it declined by a mere 3.3 per cent. In the four recessions for which there is data, sterling has gone up three times.

The full-blown recession might not be the negative event for the quid that you might think over the medium term. Markets are rather forward-looking and therefore tend to price in recessions before they happen. Historically, in the six months before a recession, sterling has tended to fall against the major currencies. When the recession bites deeper, it should rise against the Euro and Dollar as in the past. Gordon will naturally jump on this as his excellent management of the economy and hope to ride a General Election wave on the back of this confidence.

What does this mean to you? Get some Euros/Dollars back into sterling (if you have any spare) at current rates and sit it out until you can get a small profit moving them back again. The heady days of the $2 pound may be behind us, but a 10-15% climb against the Dollar and the Euro may only be six months or so away. That would, at least be manageable for those suffering with the weak pound right now.


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