Sterling: Why it can't stop falling

Sterling: Why it can't stop falling

By Edward Hadas, breakingviews.comLast Updated: 1:43PM GMT 19 Dec 2008
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The pound just won’t stop falling. As of Friday morning, the UK currency was down 5pc against the euro over a week, and 17pc since mid-October. This decline is all too justified.
Foreign exchange traders have short attention spans and a long list of concerns. And right now the pound ticks almost every box to fail a summary health check.
Does the UK need foreign cash? That’s a big tick. The country’s balance of payments deficit is running at 3pc of GDP. Are yields low, making government debt - the holding of choice for foreigners - unattractive? That’s another tick in the box. The already low 2pc policy interest rate is set to head towards zero.
Worries about the overall financial system merit a tick too. UK banks expanded their balance sheets in the boom with an abandon usually seen in developing countries like Argentina and Turkey. The subsequent mess could end in blanket nationalisation, with all the risks of the politicised, inefficient lending decisions that often come with state control.
Now for the double tick. Currency traders don’t like governments that run big deficits, which often end in inflation. The UK government is already planning to borrow an awesome 8pc of GDP - and is likely to borrow much more.
About the only bonus for sterling right now is inflation, which is falling in the UK as it is everywhere. But even that might not last, as the weak pound drives up the price of imports, equivalent to 33pc of GDP.
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After such a rush of sterling selling, a brief rebound is possible. For longer-term optimists on the pound - yes, there are a few still out there - the main hope is that a cheap currency will spur exports. But before the Germans and Chinese can be tempted by cheaper goods from the UK, the country has to produce them. That won’t be easy, no matter how low the pound falls. The UK has moved away from manufacturing more than any other rich country. Now it is too short on intellectual and physical capacity to profit from the price advantage provided by sterling’s fall.
It will take more UK pain before there is much sterling gain.

http://www.telegraph.co.uk/finance/breakingviewscom/3850857/Sterling-Why-it-cant-stop-falling.html