Euro crisis: how will it affect me?
What caused the European debt crisis, how long will it last, and how worried should Britons be?
By Paul Farrow
Published: 2:26PM BST 29 May 2010
Europe is in crisis. Austerity measures have been announced in several countries including Greece and Spain, the euro is under pressure and stock markets across the globe have fallen sharply from their recent highs – and it is all due mainly to sovereign debt.
But what is sovereign debt and why has it caused a crisis? And should people in Britain be worried?
We have spoken to the experts to help answer these questions.
Q I keep hearing about sovereign debt. What is it?
National governments issue bonds as a way of borrowing to help meet their spending on education, health, defence and so on. Just like any bond, a sovereign debt bond pays investors interest over its term and the bondholder gets his money back on maturity. In Britain, these bonds are better known as gilts.
Andy Howse, investment director for fixed income at Fidelity, said: "The promise to repay is not a guarantee. The strength of the promise is a function of the size of the debt compared to the economy in question and the cost of servicing that debt. This can change over time and between nation states."
Q What has caused the debt crisis?
In a word or two, over-borrowing. Sovereign debt is fine so long as the governments have no problem repaying the debt. But several countries have borrowed beyond their means – the ramifications of the financial crisis have left them struggling to repay their debt. This is why the IMF has agreed a financial package to bail them out.
"Greece and other countries will struggle to pay off these debts. This has led to a dramatic spike in borrowing costs for these countries, exacerbating the problems further," Mr Howse added. "Investors have begun to question the future of European Economic and Monetary Union and whether the crisis may spread beyond the peripheral European countries."
Q Which countries are affected?
Before last week the main countries that had been affected were Greece, Italy and Portugal. Last week it was the turn of Spain to announce austerity measures, while Ireland has problems too, although it is trying hard to cut its deficit.
Q Will it spread to Britain?
Only Rip van Winkel would be unaware that the UK also has a huge deficit, and so there are concerns that the crisis could spread to these shores. This was why the new coalition moved swiftly by announcing £6bn worth of cuts. This has assured investors, for the time being, that Britain will be able to reduce its deficit and repay gilt investors.
"We have more flexibility and it was very important for George Osborne to reassure global markets that our deficit is being tackled," said Azad Zangana, European economist at Schroders.
Mr Howse agreed: "A weaker pound should boost the economy by making exports more competitive, and interest rates should remain very low for an extended period. But we can't ignore this debt crisis in Europe because of the effect it may have on the level of global economic activity."
Q Should I be worried?
The good news is that Britain has some advantages over the likes of Greece and Spain. The main one is that it does not belong to the euro and so is able to manipulate the pound to try to boost our economy via interest rates. "We can devalue our currency, which makes the borrowing cheaper. Greece can't do that because it belongs to the euro," said Mr Zangana.
But don't get too complacent. Britain's position is still precarious – £6bn worth of spending cuts won't be enough to clear our £156bn deficit, and remember that our economy is reliant on its trade links to Europe. "The UK is in a relatively good position. It can set its own interest rates and has its own floating currency, which are important mechanisms for managing economic growth," said Mr Howse.
"However, the UK is not insulated from debt problems and it is in our interest that the crisis is contained and managed by the EU, IMF and other central banks."
Q How big an impact could the crisis have on the UK?
Half of all of Britain's exports go to the Continent, so if Europe's economy grinds to a halt we will feel the impact. Companies could struggle to increase sales, our economic recovery could hit the buffers and, ultimately, jobs could come under pressure.
Howard Archer, an economist at Investec, said: "There is increased pressure on Britain. The FTSE has been hit already, there are concerns of a double dip, and it's bad news for exporters, which could have a knock-on effect of the wrong kind on our domestic economy.
"The June 22 Budget is key. If the measures don't work there will be a loss of confidence in UK assets and that could store up other problems such as higher interest rates."
Q What about my investments?
You won't need reminding that every time a dark cloud hangs over our economy, or the economies of our trade partners, stock market investors run for the hills, causing share prices to fall. This is what has happened over the past fortnight or so – the FTSE100 has tumbled from 5,700 to under 5,000, although this week share prices recovered despite the eurozone crisis worsening.
But, again, don't be complacent. Most experts agree that markets are likely to be jittery for a while yet.
Q Is there a danger of a second banking crisis?
This is something that the markets have been speculating over during the past few weeks. Greek, Spanish and Italian bonds are widely held by governments, banks and institutions worldwide and this is why bank shares have been particularly hit in the recent turbulence.
Mr Howse said: "Central banks and governments have learned tough lessons from the financial crisis of 2008/09 and are very unlikely to let these problems go so far as to break the global banking system."
Q I bank with Santander. Should I move bank accounts?
Santander recently emphasised that its British operation is self-funding, raising cash from British savers to back loans to British borrowers, and does not require capital from its Spanish parent. Santander's British subsidiaries are regulated by the Financial Services Authority and individual savers are protected by the Financial Services Compensation Scheme.
The FSCS, a statutory safety net, can pay out 100pc of the first £50,000 lost per saver per bank or building society. Up to 90pc of pension and life assurance savings are also protected by the FSCS safety net.
A Santander spokesman said: "Customers need not be worried as both Santander and Santander UK are strong businesses focused on retail banking with no exposure to toxic financial products. Our UK business is strong and has a standalone credit rating of AA."
Q Will the crisis go on for much longer?
Most likely. The Greek bailout is over three years, which suggests there is no quick fix. "I think we will have a bumpy ride for a few years. There is a real sense of uncertainty on how this crisis will pan out," said Mr Zangana.
Mr Archer added: "It is very, very fragile and the eurozone crisis is deep-seated and so will not disappear overnight. We need the bailout package to be implemented as soon as possible and for the affected countries to get their act together."
Q I'm worried about losing money. What should I do?
Fund managers will talk about market blips throwing up buying opportunities while economists will make predictions that are wrong as often as they are right. It comes down to your attitude to risk and your financial goals.
It's your money and if you are of nervous disposition then invest in safe assets. The safest is cash, of course. Interest rates are low but ask yourself whether you would rather make 2pc or risk losing 10pc.
Review any investments and ensure that your portfolio is diversified for damage limitation reasons if markets implode.
http://www.telegraph.co.uk/finance/personalfinance/consumertips/7782558/Euro-crisis-how-will-it-affect-me.html
Showing posts with label UK pound. Show all posts
Showing posts with label UK pound. Show all posts
Monday, 31 May 2010
Friday, 21 May 2010
Whatever Germany does, the euro as we know it is dead
"Money can't buy you friends, but it does get you a better class of enemy" – Spike Milligan
For Angela Merkel, leader of the eurozone's richest country, a queue is forming of high-quality adversaries. As she tips German Geld und Gut into the furnace of a rescue package for the euro, while going it alone in a misguided ban on market "manipulators", the brass-neck Chancellor has infuriated domestic voters, angered her EU partners (in particular the French) and invited the so-called wolf pack of global traders to do its worst.
In one respect, Mrs Merkel is right: "The euro is in danger… if the euro fails, then Europe fails." What she has not yet admitted publicly is that the main cause of the single currency's peril appears beyond her control and therefore her impetuous response to its crisis of confidence is doomed to fail.
The euro has many flaws, but its weakest link is Greece, whose fundamental problem is that for years it spent too much, earned too little and plugged the gap by borrowing in order to enjoy a rich man's lifestyle. It flouted EU rules on the limits to budget deficits; its national accounts were a moussaka of minced statistics, topped with a cheesy sauce of jiggery-pokery.
By any legitimate measure, Greece was unworthy of eurozone membership. That it achieved card-carrying status was down to the sleight-of-hand skills of its Brussels fixers and the acquiescence of central bank bean-counters. Now we know the truth, jet-hosing it with yet more debt makes no sense. Another dose of funny money will delay but not extinguish the need for austerity.
This is why the euro, in its current form, is finished. The game is up for a monetary union that was meant to bolt together work-and-save citizens in northern Europe with the party animals of Club Med. No amount of pit props from Berlin can save the euro Mk I from collapsing under the weight of its structural dysfunctionality. You cannot run indefinitely a single currency with one interest rate for 16 economies, when there are such huge fiscal disparities.
What was once deemed unthinkable is now, I believe, inevitable: withdrawal from the eurozone of one or more of its member countries. At the bottom end, Greece and Portugal are favourites to be forced out through weakness. At the top end, proposals are already being floated in the Frankfurt press for a new "hard currency" zone, led by Germany, Austria and the Benelux countries. Either way, rich and poor are heading in opposite directions.
When asked on Sky if, in five years' time, the euro will have the same make-up as it does today, Jeremy Stretch, a currency analyst at Rabobank, the Dutch financial services giant, told me: "I think it's pretty unlikely." The euro was a boom-time construct. In the biggest bust for 80 years, it is falling apart.
Telegraph loyalists with long memories will be shocked by none of this. In 1996, Sir Martin Jacomb, then chairman of the Prudential, set out with great prescience in two pieces for The Sunday Telegraph why a European single currency, without full political integration, would end in disaster. His prognosis of the ailments that might afflict the eurozone's sickliest constituents reads as if it was penned to sum up today's turmoil.
"A country which does not handle its public finances prudently will find its long-term borrowing costs adjusted accordingly," Sir Martin predicted. "Although theory says that default is unlikely, nevertheless, a country that spends too much public money, and allows its wage costs to become uncompetitive, will experience rising unemployment and falling economic activity. The social costs may become impossible to bear."
Welcome to the headaches of George Papandreou. The bond markets called his country's bluff. Greece is skint, but its unions don't want to admit it. There is insufficient political will to tackle incompetence and corruption, never mind unaffordable state spending. But, locked into the euro, Greece cannot devalue its way out of trouble, so it relies on the kindness of strangers.
Dishing out German largesse to profligate Athens, with little expectation of a reasonable return, is a sure way for Mrs Merkel to join Gordon Brown as a political has-been. Fully aware of the revulsion felt by Mercedes and BMW employees at the prospect of their taxes being used to pay for a Hellenic car crash, she has resorted to creating a bogeyman – The Speculator.
By announcing a ban on the activities of short-sellers (those who bet to profit from falling prices in financial markets), she is hoping her decoy will avert German attention from the small print of Berlin's support for Greece, which talks of developing processes for "an orderly state insolvency". This sounds ominously like a softening-up process for a form of default.
Greece's severe difficulties were home-made. The euro has come under pressure not from dark forces of speculation but respectable investors, many of them traditional pension funds, which, quite correctly, worked out that when the crunch came, the Brussels elite would sanction an abandonment of its no bail-out rule and cough up for a messy fudge.
In 1990, the late Lord Ridley, when still a government minister, caused a storm by telling The Spectator that Europe's planned monetary union was "a German racket designed to take over the whole of Europe". One knew what he was getting at, but it has not turned out that way.
Protecting the euro has become a project via which profligate states dip their fingers in Berlin's till. Germany is taking on nasty obligations without gaining ownership of the assets. Germany's version of The Sun, Bild Zeitung, feeds its readers a regular diet of stories about the way ordinary Germans are being taken for mugs. Trust has turned to suspicion. Next stop is divorce.
As for the United Kingdom, we must be grateful that those frightfully clever Europhiles, such as Lord Mandelson and Kenneth Clarke, did not get their way. Had they been able to scrap the pound and embrace the euro this country would be even closer to ruin. Without a flexible currency, the colossal deficit clocked up by Mr Brown would have crushed us completely. We have little to thank him for, but it would be churlish to deny that his decision to reject Tony Blair's blandishments in favour of the euro was a life-saver.
Sterling's devaluation has not been pretty, but it is helping to keep our exports competitive while the coalition Government begins rebuilding the nation's finances. Siren voices from across the Channel, calling for closer integration between Britain and the rest of the EU, can be confidently rejected. As for joining the euro, I find it impossible to imagine any circumstances under which it would be in the UK's interest to do so.
Wednesday, 12 May 2010
Can you profit from the political turmoil?
Can you profit from the political turmoil?
We explain what our hung parliament and the euro crisis mean for savers and investors.
By Emma Simon and Rosie Murray-West
Published: 9:52AM BST 11 May 2010
Economic turmoil in Europe and political uncertainty at home are conspiring to send stock markets, bond markets and currency markets into overdrive. Share prices may have been buoyed by the Greek bail-out, but Gordon Brown's resignation announcement yesterday caused the pound to lose about 1½ cents against the dollar. These events are having a huge effect on the personal finances of many worried readers. Below, we give answers to the financial questions that are troubling many ordinary households hit by problems at home and abroad.
IS THE GREEK BAIL-OUT GOOD NEWS FOR UK INVESTORS?
Both the size and the scope of this bail-out have helped to stabilise jittery stock markets around the globe. European finance ministers have also unveiled a financial plan that effectively guarantees the debt of any country that uses the euro. It is hoped that this will stop the Greek debt crisis affecting other EU countries – in particular Spain and Portugal – and prevent a run on the euro.
In the short-term, at least, the plan appears to have worked, with the FTSE100 rising by 5 per cent yesterday, and the euro strengthening against the dollar after hitting a 14-month low the previous week. This can only benefit those with pensions, Isas and other investment portfolios that are largely invested in UK and European shares.
However, this rescue package has to be backed by action from various European countries to reduce budget deficits. If this does not happen it is likely to weaken the euro again, which could have a negative effect on stock markets both in Europe and the UK.
WHY HASN'T THE UK'S HUNG PARLIAMENT SENT SHARE PRICES TUMBLING?
There had been speculation that political uncertainty in the UK would cause stock markets to wobble – potentially wiping millions off people's pensions and investments. In fact, the reverse happened, and share prices rose yesterday. This was because the more immediate situation in Europe is, for now, taking precedence. However, it remains to be seen how stock markets react today to Brown's announcement, as this creates further uncertainty.
SHOULD I HOLD OFF INVESTING IN THE STOCK MARKET?
Markets look set to be volatile for some time. During such periods of volatility, investors are advised to drip-feed money into markets, to reduce the chance of investing a lump sum just before a sharp drop in share prices. Investment experts, such as Darius McDermott of Chelsea Financial Services, says that those with money to invest should use any volatility in the market to their advantage and drip-feed money in on days when the FTSE has fallen. Investing a sum of money on a regular basis – such as making monthly contributions to a pension or Isa – can smooth out these ups and downs and prove beneficial in the long run. This is known as pound cost averaging.
HOW DOES THIS AFFECT UK GILTS AND BONDS?
The guarantees only underpin the debt issued by countries in the eurozone. There is no guarantee given to the debt, or loans, issued by the UK Government. These bonds, known as gilts, will, however, be adversely affected if the ratings agencies, such as Standard &Poor's, decide to "downgrade" the UK's credit rating. This could happen if there are more delays in forming a new government, or disagreements about how the deficit should be reduced. A bigger threat to the bond and gilt markets is inflation. If this does not reduce this year it is likely to cause interest rates to rise, which will have a negative impact on gilt and bond yields.
I AM DUE TO BUY AN ANNUITY WITH MY PENSION POT. SHOULD I DO IT NOW OR HOLD OFF UNTIL LATER?
On the surface, uncertainty surrounding the hung parliament should be good news for your annuity, with gilt yields rising and pushing up annuity rates. However, Laith Khalaf, a pensions expert at Hargreaves Lansdown, says: "There is no certainty about what will happen to annuity rates." He said companies were using other investments, such as corporate bonds and equities, to back annuities, and that the annuity marketplace was not currently that competitive.
He said anyone considering buying an annuity should get a quote now, which could be valid for between 18 and 45 days. These quotes are available from providers such as annuitysupermarket.com, annuity-bureau.co.uk and h-l.co.uk
ARE INTEREST RATES LIKELY TO GO UP NOW?
Some people may be concerned that during the last recession, under the Conservatives, interest rates shot up to 15pc, but a rise of this magnitude looks unlikely. The Bank of England will be forced to raise rates if inflation increases, but even the most hawkish economists are predicting only modest rises.
WHAT ABOUT FIXED-RATE MORTGAGES? ARE THESE LIKELY TO INCREASE?
The cost of fixed-rate mortgages has actually fallen slightly over the past week, despite some sharp fluctuations in the money markets, which determine the price of these deals. David Hollingworth, of London & Country mortgage brokers, says there was a spike in these markets after the last set of inflation figures, but this has not fed through to higher mortgage prices. Earlier this week, both Northern Rock and Nationwide reduced the cost of their fixed-rate deals. "There is now more 'fat' built into the pricing of these deals, so lenders can ride out such short-term fluctuations," he says.
I WAS HOPING TO BUY MY FIRST HOUSE THIS YEAR. WILL I NOW HAVE TO PAY STAMP DUTY?
In the last Labour budget, Alistair Darling announced that first-time buyers would not have to pay stamp duty on properties priced less than £250,000. Neither the Conservatives nor the Liberal Democrats will want to repeal this. Other changes could see the abolition of Hips (Home-buyers Information Packs), which both other parties say are an expensive brake on the property market.
WHAT WILL HAPPEN TO MY CHILD'S CHILD TRUST FUND IF THE SAVINGS SCHEME IS SCRAPPED?
The Tories have suggested that the Child Trust Fund (CTF), which was one of the pioneering savings schemes of the Labour government, will be scrapped for all but the most deprived families. Doing so is likely to require primary legislation, according to Martin Shaw, chief executive of the Association of Financial Mutuals, since the current legislation suggests the trust funds are universal.
He said that although it is not yet clear what would happen if the funds were scrapped, indications are that accounts that are already in place would run until their recipients' 18th birthdays, when they would become Isa-type accounts. Children who are currently below the age of seven would be unlikely to get Government top-ups to their accounts unless they have parents on very low incomes.
He suggested that legislation scrapping the accounts could come into force as early as July if it was included in a finance bill, and urged those who had not yet invested their CTF vouchers to act quickly. The voucher is sent when a child is registered for child benefit.
I AM HOPING TO GO ON HOLIDAY ABROAD THIS SUMMER. WHAT WILL HAPPEN TO MY SPENDING MONEY?
The currency market is hard to call at the moment, with the pound's position against the euro confused by events in Greece. It has already strengthened this week, and Duncan Higgins, market analyst at the currency group Caxton FX, expects it to strengthen further if details of any Tory and Lib Dem pact are fleshed out.
He said that those choosing between the eurozone and the US as destinations should bear in mind that the US recovery is outstripping ours, and this will cause continued weakness against the dollar. "Against the euro our position is better, as the bail-out is really treating a symptom rather than a cause and there will be ongoing problems," he says. However, he also warns that if a coalition government is announced and then does not work, or there are further shocks, the pound will fall further.
If you see an attractive rate against the euro you can lock into it by using a prepay currency card for your travel money with either Caxton FX or FairFX. If you require more money, for example if you have a second property in the eurozone, you could take out a forward contract with your broker now to hedge yourself against any losses.
http://www.telegraph.co.uk/finance/personalfinance/investing/7709528/Can-you-profit-from-the-political-turmoil.html
We explain what our hung parliament and the euro crisis mean for savers and investors.
By Emma Simon and Rosie Murray-West
Published: 9:52AM BST 11 May 2010
Economic turmoil in Europe and political uncertainty at home are conspiring to send stock markets, bond markets and currency markets into overdrive. Share prices may have been buoyed by the Greek bail-out, but Gordon Brown's resignation announcement yesterday caused the pound to lose about 1½ cents against the dollar. These events are having a huge effect on the personal finances of many worried readers. Below, we give answers to the financial questions that are troubling many ordinary households hit by problems at home and abroad.
IS THE GREEK BAIL-OUT GOOD NEWS FOR UK INVESTORS?
Both the size and the scope of this bail-out have helped to stabilise jittery stock markets around the globe. European finance ministers have also unveiled a financial plan that effectively guarantees the debt of any country that uses the euro. It is hoped that this will stop the Greek debt crisis affecting other EU countries – in particular Spain and Portugal – and prevent a run on the euro.
In the short-term, at least, the plan appears to have worked, with the FTSE100 rising by 5 per cent yesterday, and the euro strengthening against the dollar after hitting a 14-month low the previous week. This can only benefit those with pensions, Isas and other investment portfolios that are largely invested in UK and European shares.
However, this rescue package has to be backed by action from various European countries to reduce budget deficits. If this does not happen it is likely to weaken the euro again, which could have a negative effect on stock markets both in Europe and the UK.
WHY HASN'T THE UK'S HUNG PARLIAMENT SENT SHARE PRICES TUMBLING?
There had been speculation that political uncertainty in the UK would cause stock markets to wobble – potentially wiping millions off people's pensions and investments. In fact, the reverse happened, and share prices rose yesterday. This was because the more immediate situation in Europe is, for now, taking precedence. However, it remains to be seen how stock markets react today to Brown's announcement, as this creates further uncertainty.
SHOULD I HOLD OFF INVESTING IN THE STOCK MARKET?
Markets look set to be volatile for some time. During such periods of volatility, investors are advised to drip-feed money into markets, to reduce the chance of investing a lump sum just before a sharp drop in share prices. Investment experts, such as Darius McDermott of Chelsea Financial Services, says that those with money to invest should use any volatility in the market to their advantage and drip-feed money in on days when the FTSE has fallen. Investing a sum of money on a regular basis – such as making monthly contributions to a pension or Isa – can smooth out these ups and downs and prove beneficial in the long run. This is known as pound cost averaging.
HOW DOES THIS AFFECT UK GILTS AND BONDS?
The guarantees only underpin the debt issued by countries in the eurozone. There is no guarantee given to the debt, or loans, issued by the UK Government. These bonds, known as gilts, will, however, be adversely affected if the ratings agencies, such as Standard &Poor's, decide to "downgrade" the UK's credit rating. This could happen if there are more delays in forming a new government, or disagreements about how the deficit should be reduced. A bigger threat to the bond and gilt markets is inflation. If this does not reduce this year it is likely to cause interest rates to rise, which will have a negative impact on gilt and bond yields.
I AM DUE TO BUY AN ANNUITY WITH MY PENSION POT. SHOULD I DO IT NOW OR HOLD OFF UNTIL LATER?
On the surface, uncertainty surrounding the hung parliament should be good news for your annuity, with gilt yields rising and pushing up annuity rates. However, Laith Khalaf, a pensions expert at Hargreaves Lansdown, says: "There is no certainty about what will happen to annuity rates." He said companies were using other investments, such as corporate bonds and equities, to back annuities, and that the annuity marketplace was not currently that competitive.
He said anyone considering buying an annuity should get a quote now, which could be valid for between 18 and 45 days. These quotes are available from providers such as annuitysupermarket.com, annuity-bureau.co.uk and h-l.co.uk
ARE INTEREST RATES LIKELY TO GO UP NOW?
Some people may be concerned that during the last recession, under the Conservatives, interest rates shot up to 15pc, but a rise of this magnitude looks unlikely. The Bank of England will be forced to raise rates if inflation increases, but even the most hawkish economists are predicting only modest rises.
WHAT ABOUT FIXED-RATE MORTGAGES? ARE THESE LIKELY TO INCREASE?
The cost of fixed-rate mortgages has actually fallen slightly over the past week, despite some sharp fluctuations in the money markets, which determine the price of these deals. David Hollingworth, of London & Country mortgage brokers, says there was a spike in these markets after the last set of inflation figures, but this has not fed through to higher mortgage prices. Earlier this week, both Northern Rock and Nationwide reduced the cost of their fixed-rate deals. "There is now more 'fat' built into the pricing of these deals, so lenders can ride out such short-term fluctuations," he says.
I WAS HOPING TO BUY MY FIRST HOUSE THIS YEAR. WILL I NOW HAVE TO PAY STAMP DUTY?
In the last Labour budget, Alistair Darling announced that first-time buyers would not have to pay stamp duty on properties priced less than £250,000. Neither the Conservatives nor the Liberal Democrats will want to repeal this. Other changes could see the abolition of Hips (Home-buyers Information Packs), which both other parties say are an expensive brake on the property market.
WHAT WILL HAPPEN TO MY CHILD'S CHILD TRUST FUND IF THE SAVINGS SCHEME IS SCRAPPED?
The Tories have suggested that the Child Trust Fund (CTF), which was one of the pioneering savings schemes of the Labour government, will be scrapped for all but the most deprived families. Doing so is likely to require primary legislation, according to Martin Shaw, chief executive of the Association of Financial Mutuals, since the current legislation suggests the trust funds are universal.
He said that although it is not yet clear what would happen if the funds were scrapped, indications are that accounts that are already in place would run until their recipients' 18th birthdays, when they would become Isa-type accounts. Children who are currently below the age of seven would be unlikely to get Government top-ups to their accounts unless they have parents on very low incomes.
He suggested that legislation scrapping the accounts could come into force as early as July if it was included in a finance bill, and urged those who had not yet invested their CTF vouchers to act quickly. The voucher is sent when a child is registered for child benefit.
I AM HOPING TO GO ON HOLIDAY ABROAD THIS SUMMER. WHAT WILL HAPPEN TO MY SPENDING MONEY?
The currency market is hard to call at the moment, with the pound's position against the euro confused by events in Greece. It has already strengthened this week, and Duncan Higgins, market analyst at the currency group Caxton FX, expects it to strengthen further if details of any Tory and Lib Dem pact are fleshed out.
He said that those choosing between the eurozone and the US as destinations should bear in mind that the US recovery is outstripping ours, and this will cause continued weakness against the dollar. "Against the euro our position is better, as the bail-out is really treating a symptom rather than a cause and there will be ongoing problems," he says. However, he also warns that if a coalition government is announced and then does not work, or there are further shocks, the pound will fall further.
If you see an attractive rate against the euro you can lock into it by using a prepay currency card for your travel money with either Caxton FX or FairFX. If you require more money, for example if you have a second property in the eurozone, you could take out a forward contract with your broker now to hedge yourself against any losses.
http://www.telegraph.co.uk/finance/personalfinance/investing/7709528/Can-you-profit-from-the-political-turmoil.html
Wednesday, 3 March 2010
Sterling's slippery slope
Sterling's slippery slope
Telegraph View: the benign devaluation threatens to become a rout
This benign devaluation now threatens, however, to turn into a rout. For this week's fall in the pound has been prompted not by worries over Britain's prospects, but by doubts about the economic credibility of the Government. The Tories' diminishing poll lead has raised the spectre of a hung parliament, and of chaos and gridlock in government at the worst possible time. The markets have taken fright: as Kenneth Clarke, the shadow business secretary, observed yesterday, it has only been the prospect of a Conservative victory, and the arrival of a government prepared to tackle the fiscal crisis head on, that has held down interest rates and sustained sterling in recent months. The possibility that this may not happen has alarmed foreign investors, for it is uncertainty that spooks the markets.
Given that we have nine weeks before polling day, there is plenty of scope for more damage. The Tories must take some of the blame. The markets have spotted what we have already highlighted: a worrying uncertainty in the Conservative message. But there is a heavier responsibility on the Government. Reports that the Prime Minister is trying to push the Chancellor into a pre-election giveaway are troubling. They reinforce the impression that Labour is not serious about tackling the deficit and that has added to the market jitters. Alistair Darling has an obligation to ignore his next-door neighbour and put country before party, by ensuring a credible deficit reduction plan is at the heart of his Budget.
Sunday, 11 October 2009
Ringgit weakest in more than a year versus Aussie
Ringgit weakest in more than a year versus Aussie
Tags: Australian dollar | Azrul Azwar | Bank Islam Malaysia Bhd | Bank Negara Malaysia | Canada | New Zealand | Ringgit | Weakest level
Written by Chong Jin Hun
Thursday, 08 October 2009 11:00
KUALA LUMPUR : The ringgit traded at its weakest level against a firmer Australian dollar in more than a year yesterday, after policymakers in Australia unexpectedly raised its key interest rate to 3.25% from 3%, prompting demand for the Australian dollar.
Investors tend to park their money in countries with higher lending rates to capitalise on higher returns.
The ringgit weakened as low as 3.0619 versus the Australian dollar at 5.10am yesterday before strengthening to 3.0432 at 10.16am. A day earlier, the ringgit was traded at 3.0587 against the Australian dollar, the weakest in 14 months since August 2008, compared to the 2.2824 level seen in February this year
Economists said the surprise move by Australian lawmakers could result in similar initiatives among other commodity-based economies such as New Zealand and Canada.
“Countries that may follow suit could be other commodity-based economies, “ Bank Islam Malaysia Bhd senior economist Azrul Azwar told The Edge Financial Daily yesterday.
In Malaysia, while commodities like palm oil, and oil and gas, constitute a crucial component of the nation’s economy, Azrul said the country should not be regarded as a commodity-based entity.
Meanwhile, an improving economic climate in Malaysia is expected to see a stronger a ringgit versus a weakening US dollar.
Azrul said as recovery in the broader landscape was still tentative, a rapid appreciation of the ringgit might have a negative impact on the nation’s export competitiveness. However, a stronger ringgit could be one of the contributing factors in containing imported inflation.
“With increasing signs of improving economic conditions in Malaysia, and expectation of a resumption of positive GDP (gross domestic product) growth by the fourth quarter of 2009, the way forward for the ringgit is to strengthen.
“I think it is prudent to let market forces dictate the level of the ringgit but at the same time we should exercise an orderly and gradual strengthening of the ringgit,” he said.
Bank Negara Malaysia had pegged the ringgit at 3.80 against the US dollar on Sept 2, 1998 during the Asian financial crisis then. The fixed-exchange rate policy was scrapped on July 21, 2005, and replaced by a managed-float system which allows the central bank to monitor the ringgit’s value against a basket of currencies.
An interest rate hike in the US would trigger a sharp rebound in the US dollar. In its latest “Standard Chartered Global Focus” report, the bank said it did not foresee US policymakers initiating a rate hike throughout 2010.
“We think this is unlikely. We also believe that the US and the UK will continue to run wide fiscal deficits through 2010 — far larger as a share of GDP than those in the EM (emerging-market) economies. This, combined with ultra-loose monetary policy, may put continued negative pressure on both currencies,” Standard Chartered said.
This article appeared in The Edge Financial Daily, October 8, 2009.
Tags: Australian dollar | Azrul Azwar | Bank Islam Malaysia Bhd | Bank Negara Malaysia | Canada | New Zealand | Ringgit | Weakest level
Written by Chong Jin Hun
Thursday, 08 October 2009 11:00
KUALA LUMPUR : The ringgit traded at its weakest level against a firmer Australian dollar in more than a year yesterday, after policymakers in Australia unexpectedly raised its key interest rate to 3.25% from 3%, prompting demand for the Australian dollar.
Investors tend to park their money in countries with higher lending rates to capitalise on higher returns.
The ringgit weakened as low as 3.0619 versus the Australian dollar at 5.10am yesterday before strengthening to 3.0432 at 10.16am. A day earlier, the ringgit was traded at 3.0587 against the Australian dollar, the weakest in 14 months since August 2008, compared to the 2.2824 level seen in February this year
Economists said the surprise move by Australian lawmakers could result in similar initiatives among other commodity-based economies such as New Zealand and Canada.
“Countries that may follow suit could be other commodity-based economies, “ Bank Islam Malaysia Bhd senior economist Azrul Azwar told The Edge Financial Daily yesterday.
In Malaysia, while commodities like palm oil, and oil and gas, constitute a crucial component of the nation’s economy, Azrul said the country should not be regarded as a commodity-based entity.
Meanwhile, an improving economic climate in Malaysia is expected to see a stronger a ringgit versus a weakening US dollar.
Azrul said as recovery in the broader landscape was still tentative, a rapid appreciation of the ringgit might have a negative impact on the nation’s export competitiveness. However, a stronger ringgit could be one of the contributing factors in containing imported inflation.
“With increasing signs of improving economic conditions in Malaysia, and expectation of a resumption of positive GDP (gross domestic product) growth by the fourth quarter of 2009, the way forward for the ringgit is to strengthen.
“I think it is prudent to let market forces dictate the level of the ringgit but at the same time we should exercise an orderly and gradual strengthening of the ringgit,” he said.
Bank Negara Malaysia had pegged the ringgit at 3.80 against the US dollar on Sept 2, 1998 during the Asian financial crisis then. The fixed-exchange rate policy was scrapped on July 21, 2005, and replaced by a managed-float system which allows the central bank to monitor the ringgit’s value against a basket of currencies.
An interest rate hike in the US would trigger a sharp rebound in the US dollar. In its latest “Standard Chartered Global Focus” report, the bank said it did not foresee US policymakers initiating a rate hike throughout 2010.
“We think this is unlikely. We also believe that the US and the UK will continue to run wide fiscal deficits through 2010 — far larger as a share of GDP than those in the EM (emerging-market) economies. This, combined with ultra-loose monetary policy, may put continued negative pressure on both currencies,” Standard Chartered said.
This article appeared in The Edge Financial Daily, October 8, 2009.
Wednesday, 23 September 2009
Pound slides again as markets enter Bank of England-fuelled 'bubble' stage
Pound slides again as markets enter Bank of England-fuelled 'bubble' stage
The pound slid closer to parity with the euro on Monday, as one of London's leading hedge fund managers warned stock markets are in a Government-fuelled bubble.
By Edmund Conway and Jamie Dunkley
Published: 6:26AM BST 22 Sep 2009
Pound slides closer to parity with euro as it hits a five-month low against the single currency. Photo: CHRISTOPHER PLEDGER "Markets are now entering a bubble phase [which may last] until the end of the year," said Crispin Odey of Odey Asset Management.
However, the bubble is almost entirely dependent on the Bank of England's quantitative easing (QE) policy, through which it is creating £175bn and pumping it into the system by buying Government debt, he added.
Mr Odey's comments came as the pound fell further against other leading currencies after a report from the Bank warned of the effect of the financial crisis on sterling's long-term value.
Mr Odey told clients in a note: "Individuals and institutions are stampeding into real assets – eager to have anything but cash or government bonds... The latter are expensive because of the QE which has caused that bubble.
"At some point the QE will have to come to an end but, until it does, this bull market is sponsored by HMG and everyone should enjoy it."
FTSE breaks six-day winning streak
Katherine Garrett-Cox, chief executive of Alliance Trust, said: "I think the recent stock market rally has been driven by sentiment rather than fundamental facts.
"In 2008 markets were driven by fear; this year they have been driven by greed.
"I'm sceptical about the market recovery given the fiscal environment we are in. Public spending is falling, consumer spending is down and unemployment will rise."
Although many central banks have taken on a QE policy, the Bank has committed to creating and spending more than any other, arguing that the alternative outcome is severe deflation. However, this is thought to have sparked a gradual exodus from UK investments by overseas asset managers fearful that the policy may generate inflation.
This has pushed the pound lower against most other currencies. The euro hit a five-month high against sterling yesterday before slipping back to 90.58p. Citigroup said yesterday that sterling would drop to parity against the euro in the coming months.
The bank's analyst Michael Hart said: "Tight fiscal policies and easy money is about as negative a policy mix as it is possible to get for the currency and we expect sterling to exceed parity with the euro."
http://www.telegraph.co.uk/finance/economics/6216874/Pound-slides-again-as-markets-enter-Bank-of-England-fuelled-bubble-stage.html
The pound slid closer to parity with the euro on Monday, as one of London's leading hedge fund managers warned stock markets are in a Government-fuelled bubble.
By Edmund Conway and Jamie Dunkley
Published: 6:26AM BST 22 Sep 2009
Pound slides closer to parity with euro as it hits a five-month low against the single currency. Photo: CHRISTOPHER PLEDGER "Markets are now entering a bubble phase [which may last] until the end of the year," said Crispin Odey of Odey Asset Management.
However, the bubble is almost entirely dependent on the Bank of England's quantitative easing (QE) policy, through which it is creating £175bn and pumping it into the system by buying Government debt, he added.
Mr Odey's comments came as the pound fell further against other leading currencies after a report from the Bank warned of the effect of the financial crisis on sterling's long-term value.
Mr Odey told clients in a note: "Individuals and institutions are stampeding into real assets – eager to have anything but cash or government bonds... The latter are expensive because of the QE which has caused that bubble.
"At some point the QE will have to come to an end but, until it does, this bull market is sponsored by HMG and everyone should enjoy it."
FTSE breaks six-day winning streak
Katherine Garrett-Cox, chief executive of Alliance Trust, said: "I think the recent stock market rally has been driven by sentiment rather than fundamental facts.
"In 2008 markets were driven by fear; this year they have been driven by greed.
"I'm sceptical about the market recovery given the fiscal environment we are in. Public spending is falling, consumer spending is down and unemployment will rise."
Although many central banks have taken on a QE policy, the Bank has committed to creating and spending more than any other, arguing that the alternative outcome is severe deflation. However, this is thought to have sparked a gradual exodus from UK investments by overseas asset managers fearful that the policy may generate inflation.
This has pushed the pound lower against most other currencies. The euro hit a five-month high against sterling yesterday before slipping back to 90.58p. Citigroup said yesterday that sterling would drop to parity against the euro in the coming months.
The bank's analyst Michael Hart said: "Tight fiscal policies and easy money is about as negative a policy mix as it is possible to get for the currency and we expect sterling to exceed parity with the euro."
http://www.telegraph.co.uk/finance/economics/6216874/Pound-slides-again-as-markets-enter-Bank-of-England-fuelled-bubble-stage.html
Friday, 7 August 2009
Pound and gilt yields slide as Bank of England pledges to buy £50bn more
Pound and gilt yields slide as Bank of England pledges to buy £50bn more
Money and currency markets were sent reeling after the Bank of England surprised the City by unexpectedly extending its programme of Quantitative Easing (QE) by £50bn.
By Edmund Conway, Economics Editor
Published: 5:54AM BST 07 Aug 2009
Far from bringing its programme of bond-buying to an end, the Bank's Monetary Policy Committee has extended it beyond the initial £150bn ceiling agreed with the Chancellor.
The Bank said it planned to increase the scale of its programme to £175bn over the next three months, buying up a further chunk of the UK sovereign debt market. As expected, it also left the Bank rate on hold at 0.5pc. The move sent the pound more than a cent and a half lower against the dollar to $1.6801, although sterling strengthened against the euro, whose guardian, the European Central Bank, also left its key rate on hold at 1pc.
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ECB holds interest rate as downturn slows
*
Expert reaction to Bank's move
*
BoE cautious about recovery as it prints £50bn more
The announcement caused a further flurry in gilt market, where yields dropped at one point by more than 20 basis points, before settling at just above 3.7pc.
So much of the gilts market does the Bank now own that, in a landmark move, it also agreed that it would temporarily lend out gilts through the Debt Management Office to ensure that banks are able to close out positions as necessary.
The Bank has also suspended its purchases of four particular maturities of gilts after it emerged that it had bought as much as 70pc of their total issue. In a further sign of the rate at which it is exhausting the gilt market, the Bank will also start buying gilts of both shorter and longer maturities than the 5 to 25 year set it was originally buying.
Danny Gabay of Fathom Consulting said the news "reflects the fact that the Bank has to all intents and purposes 'cornered' the market for certain Gilts or bonds, to which market participants may still need to have access. Innocent enough - but it makes the charge that the whole [scheme] is an elaborate smokescreen for monetising the government's ballooning deficit even harder to refute.
"So, while we welcome the news of an extension to the asset programme, we would once again urge the MPC to consider a much wider range of assets to purchase than government bonds."
Yesterday's decision means that the Bank will soon own almost half of the entire gilts market, currently worth around £400bn, raising further questions about the Government's reliance on the QE programme to keep its financing under control.
Former Bank policymaker Sushil Wadhwani said he suspected the Bank's enthusiasm for QE could store up problems next year as attention focuses on the creditworthiness of various countries around the world.
"It seems to me that with the economic indicators bouncing they didn't need to take the risk [of extending QE], though I don't think it will do a lot of harm at this stage."
http://www.telegraph.co.uk/finance/financetopics/recession/5984999/Pound-and-gilt-yields-slide-as-Bank-of-England-pledges-to-buy-50bn-more.html
Money and currency markets were sent reeling after the Bank of England surprised the City by unexpectedly extending its programme of Quantitative Easing (QE) by £50bn.
By Edmund Conway, Economics Editor
Published: 5:54AM BST 07 Aug 2009
Far from bringing its programme of bond-buying to an end, the Bank's Monetary Policy Committee has extended it beyond the initial £150bn ceiling agreed with the Chancellor.
The Bank said it planned to increase the scale of its programme to £175bn over the next three months, buying up a further chunk of the UK sovereign debt market. As expected, it also left the Bank rate on hold at 0.5pc. The move sent the pound more than a cent and a half lower against the dollar to $1.6801, although sterling strengthened against the euro, whose guardian, the European Central Bank, also left its key rate on hold at 1pc.
Related Articles
*
ECB holds interest rate as downturn slows
*
Expert reaction to Bank's move
*
BoE cautious about recovery as it prints £50bn more
The announcement caused a further flurry in gilt market, where yields dropped at one point by more than 20 basis points, before settling at just above 3.7pc.
So much of the gilts market does the Bank now own that, in a landmark move, it also agreed that it would temporarily lend out gilts through the Debt Management Office to ensure that banks are able to close out positions as necessary.
The Bank has also suspended its purchases of four particular maturities of gilts after it emerged that it had bought as much as 70pc of their total issue. In a further sign of the rate at which it is exhausting the gilt market, the Bank will also start buying gilts of both shorter and longer maturities than the 5 to 25 year set it was originally buying.
Danny Gabay of Fathom Consulting said the news "reflects the fact that the Bank has to all intents and purposes 'cornered' the market for certain Gilts or bonds, to which market participants may still need to have access. Innocent enough - but it makes the charge that the whole [scheme] is an elaborate smokescreen for monetising the government's ballooning deficit even harder to refute.
"So, while we welcome the news of an extension to the asset programme, we would once again urge the MPC to consider a much wider range of assets to purchase than government bonds."
Yesterday's decision means that the Bank will soon own almost half of the entire gilts market, currently worth around £400bn, raising further questions about the Government's reliance on the QE programme to keep its financing under control.
Former Bank policymaker Sushil Wadhwani said he suspected the Bank's enthusiasm for QE could store up problems next year as attention focuses on the creditworthiness of various countries around the world.
"It seems to me that with the economic indicators bouncing they didn't need to take the risk [of extending QE], though I don't think it will do a lot of harm at this stage."
http://www.telegraph.co.uk/finance/financetopics/recession/5984999/Pound-and-gilt-yields-slide-as-Bank-of-England-pledges-to-buy-50bn-more.html
Tuesday, 4 August 2009
Pound soars after manufacturing sector grows for first time in a year
Pound soars after manufacturing sector grows for first time in a year
The pound leapt against world currencies after an unexpected surge from the manufacturing sector sparked speculation that the Bank of England will freeze its quantitative easing (QE) programme later this week.
By Edmund Conway, Economics Editor
Published: 6:46PM BST 03 Aug 2009
Sterling rose by 3½ cents against the dollar to $1.6928 after new survey data showed that manufacturing industry is growing again for the first time in more than a year. The Purchasing Manager's Index (PMI) for the sector, produced by Markit, rose from an upwardly-revised 47.4 points to 50.8 points in July. It is the first time it has surpassed the 50-level, which separates expansion from contraction, since March 2008.
The increase, which was far beyond what economists had anticipated, pushed sterling higher, along with gilt yields, since the PMI has often been a reliable signal for official measures of economic growth.
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Nine months before we see effects of £125bn quantitative easing, says Bank of England
Prices charged by UK manufacturers unexpectedly falls in June
Blanchflower warns Bank of England against raising rates too quickly
China is right to fear US dollar debauchery
Interest rates: MPC to keep rates at 0.5pc
The Bank will decide on Thursday whether to extend its QE programme to beyond £125bn, based on whether it judges it has pumped enough stimulus into the economy.
James Knightley, of ING, said that the increase was consistent with the economy growing by 1pc year-on-year in the second half of 2009. "This suggests that the UK economy is likely to record positive growth through the rest of this year and into next," he said. "However, ongoing deleveraging and rising unemployment (the PMI employment component still shows job losses) still suggests that the recovery will be fragile."
The positive economic news coincided with another strong day for markets, which were also boosted by news of strong investment banking profits from Barclays and HSBC. The FTSE 100 rose by 74.1 to 4682.46 points, having already achieved its biggest monthly gain in six years during July.
In a further sign of recovery, the TED spread, a measure of financial market stress which calculates the difference between banks' cost of borrowing and US Treasury interest rates, dropped beneath the 30 basis point level for the first time since before the onset of the financial crisis in mid-2007.
http://www.telegraph.co.uk/finance/currency/5967561/Pound-soars-after-manufacturing-sector-grows-for-first-time-in-a-year.html
The pound leapt against world currencies after an unexpected surge from the manufacturing sector sparked speculation that the Bank of England will freeze its quantitative easing (QE) programme later this week.
By Edmund Conway, Economics Editor
Published: 6:46PM BST 03 Aug 2009
Sterling rose by 3½ cents against the dollar to $1.6928 after new survey data showed that manufacturing industry is growing again for the first time in more than a year. The Purchasing Manager's Index (PMI) for the sector, produced by Markit, rose from an upwardly-revised 47.4 points to 50.8 points in July. It is the first time it has surpassed the 50-level, which separates expansion from contraction, since March 2008.
The increase, which was far beyond what economists had anticipated, pushed sterling higher, along with gilt yields, since the PMI has often been a reliable signal for official measures of economic growth.
Related Articles
Nine months before we see effects of £125bn quantitative easing, says Bank of England
Prices charged by UK manufacturers unexpectedly falls in June
Blanchflower warns Bank of England against raising rates too quickly
China is right to fear US dollar debauchery
Interest rates: MPC to keep rates at 0.5pc
The Bank will decide on Thursday whether to extend its QE programme to beyond £125bn, based on whether it judges it has pumped enough stimulus into the economy.
James Knightley, of ING, said that the increase was consistent with the economy growing by 1pc year-on-year in the second half of 2009. "This suggests that the UK economy is likely to record positive growth through the rest of this year and into next," he said. "However, ongoing deleveraging and rising unemployment (the PMI employment component still shows job losses) still suggests that the recovery will be fragile."
The positive economic news coincided with another strong day for markets, which were also boosted by news of strong investment banking profits from Barclays and HSBC. The FTSE 100 rose by 74.1 to 4682.46 points, having already achieved its biggest monthly gain in six years during July.
In a further sign of recovery, the TED spread, a measure of financial market stress which calculates the difference between banks' cost of borrowing and US Treasury interest rates, dropped beneath the 30 basis point level for the first time since before the onset of the financial crisis in mid-2007.
http://www.telegraph.co.uk/finance/currency/5967561/Pound-soars-after-manufacturing-sector-grows-for-first-time-in-a-year.html
Sunday, 31 May 2009
Sterling surges as investors seize on global green shoots
Sterling surges as investors seize on global green shoots
Sterling surged against the dollar on Friday as investors seized on new evidence that the downturn in the global economy may be easing.
By Telegraph staff
Last Updated: 4:53PM BST 29 May 2009
The pound stormed beyond $1.61, its highest level since November, after Nationwide figures showed an unexpected rise in house prices this month. The better number in the UK was added to by Japan, where industrial production rebounded, and the strong performance of the Indian economy in the first quarter.
The currency closed at $1.6125 in London, up almost two cents on the day.
Although economists have generally cautioned that any recovery will be very slow, financial markets are currently focused on any evidence of improvement from the free fall seen in the wake of Lehman Brothers' collapse.
"Sterling was absolutely hammered in the fourth quarter and people were loathe to hold it because it was seen as very risky," said Paul Robinson of Barclays. "But as risk appetite comes back into the market, then that's good for the currency."
It's that return of investors' willingness to take risks that is also hurting the dollar, explained Mr Robinson. At the height of the banking crisis last autumn people flocked to the dollar because it is the world's most liquid currency and provided shelter during the turmoil. That logic is now ebbing, he said.
In the UK, house prices gained 1.2pc - only their second gain in the last year. Sentiment was also buoyed after a survey showed that UK consumers are now at their most confident in almost a year. The news from GfK comes a day after the CBI said that retailers are feeling more optimistic than at anytime since 2007.
However, Nationwide's own chief economist, Martin Gahbauer, was quick to downplay suggestions that house prices may have reached a bottom.
"Although the short-term trend in house prices has clearly improved from where it was at the beginning of the year, it is still too early to say that the market is turning definitely," said Mr Gahbauer.
http://www.telegraph.co.uk/finance/economics/houseprices/5405998/Sterling-surges-as-investors-seize-on-global-green-shoots.html
Sterling surged against the dollar on Friday as investors seized on new evidence that the downturn in the global economy may be easing.
By Telegraph staff
Last Updated: 4:53PM BST 29 May 2009
The pound stormed beyond $1.61, its highest level since November, after Nationwide figures showed an unexpected rise in house prices this month. The better number in the UK was added to by Japan, where industrial production rebounded, and the strong performance of the Indian economy in the first quarter.
The currency closed at $1.6125 in London, up almost two cents on the day.
Although economists have generally cautioned that any recovery will be very slow, financial markets are currently focused on any evidence of improvement from the free fall seen in the wake of Lehman Brothers' collapse.
"Sterling was absolutely hammered in the fourth quarter and people were loathe to hold it because it was seen as very risky," said Paul Robinson of Barclays. "But as risk appetite comes back into the market, then that's good for the currency."
It's that return of investors' willingness to take risks that is also hurting the dollar, explained Mr Robinson. At the height of the banking crisis last autumn people flocked to the dollar because it is the world's most liquid currency and provided shelter during the turmoil. That logic is now ebbing, he said.
In the UK, house prices gained 1.2pc - only their second gain in the last year. Sentiment was also buoyed after a survey showed that UK consumers are now at their most confident in almost a year. The news from GfK comes a day after the CBI said that retailers are feeling more optimistic than at anytime since 2007.
However, Nationwide's own chief economist, Martin Gahbauer, was quick to downplay suggestions that house prices may have reached a bottom.
"Although the short-term trend in house prices has clearly improved from where it was at the beginning of the year, it is still too early to say that the market is turning definitely," said Mr Gahbauer.
http://www.telegraph.co.uk/finance/economics/houseprices/5405998/Sterling-surges-as-investors-seize-on-global-green-shoots.html
Wednesday, 11 March 2009
Pound Falls Against Euro as Housing Sales Slide to Record Low
Pound Falls Against Euro as Housing Sales Slide to Record Low
By Matthew Brown
March 10 (Bloomberg) -- The pound fell to its weakest in more than five weeks against the euro after Britain’s housing sales slipped to the lowest level since at least 1978 and manufacturing shrank the most in four decades.
The U.K. currency dropped for a third day versus the 16- nation currency as the Bank of England prepared to print money to buy assets as part of a quantitative easing policy. The average number of transactions in a survey of real-estate agents and surveyors fell to 9.5 per respondent in the quarter through February, the least since the data began three decades ago, the Royal Institution of Chartered Surveyors said today.
“Investors are saying we don’t like the banking situation in the U.K., the housing data was bad, and we’re nervous about the economy,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International. “Quantitative easing is about to begin, and all these factors tell us to stand aside and wait until it gets cheaper.”
The pound weakened to 92.33 pence per euro by 5:20 p.m. in London, from 91.53 yesterday. It slipped to 92.48 pence earlier, the lowest level since Jan. 29. Against the dollar, the currency was little changed at $1.3784.
Factory production dropped 2.9 percent in January from December, the Office for National Statistics in London said. Economists in a Bloomberg survey predicted a 1.4 percent decline. Manufacturing shrank 6.4 percent in the three months through January, the most since records began in 1968.
Quantitative Easing
The Bank of England will seek to buy 2 billion pounds of gilts in an operation for its asset-purchase facility on March 11, it said last week. Policy makers said March 5 they will acquire as much as 150 billion pounds of government and corporate assets, the first central bank to adopt quantitative easing since the Bank of Japan in the 1990s.
“With the Bank of England taking far more aggressive steps than any other central bank, bar possibly the Federal Reserve, the pound remains vulnerable to the downside,” Derek Halpenny, the London-based European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a note today.
Policy makers cut the nation’s benchmark interest rate 4.5 percentage points to an all-time low of 0.5 percent since October as the economy headed for its worst recession since World War II. Gross domestic product contracted 1.5 percent in the fourth quarter, the most since 1980, a report on Feb. 25 showed.
The pound may still strengthen to 89 pence per euro in the next three months as the recession in the euro region economy deepens, Stretch said. For Merrill Lynch & Co., the euro’s gain against the pound may have gone to far.
Gilts Rise
“We will probably look to fade the move higher in the euro- pound if and when the short-term interest-rate spread-compression trend resumes,” wrote Steven Pearson, a London-based strategist at Merrill Lynch. “It is worth noting that with the Bank of England bank rate having likely reached its terminal level, pound-euro may now start to trade well during risk aversion.”
U.K. government bonds rose, with the yield on the 10-year gilt falling one basis point to 3.11 percent. The 4.5 percent security due March 2019 advanced 0.09, or 90 pence per 1,000- pound face amount, to 111.82. Two-year gilt yields slipped one basis point to 1.32 percent. Bond yields move inversely to prices.
The U.K. Treasury today sold 3 billion pounds of 4.5 percent bonds maturing in 2019. The sale received bids 2.06 times the amount offered, the Debt Management Office said, compared with an average 1.9 times at the last three auctions of the securities.
‘Carried Away’
“Investors are getting carried away with the euphoria surrounding quantitative easing,” said Ian Williams, chief executive officer of Charteris Portfolio Managers in London. “The Bank of England is a buyer of gilts, but the U.K. government is still a net seller of gilts. The compression in yields when the penny drops is going to be difficult to maintain, and the implications of quantitative easing are inflationary.”
The yield on the 10-year gilt may rise to 3.25 percent by the end of April, said Williams, whose U.K. government-bond fund beat all its competitors in January, according to data from Lipper and given to Bloomberg by Charteris.
Ten-year gilts may keep gaining, according to technical strategists at Barclays Plc.
“Bigger picture, the secular bull trend remains intact, particularly following the recent failure to overcome 3.82 percent-area support,” Barclays Capital analysts including Jordan Kotick in New York wrote in a report. The yield may move toward 2.70 percent “medium term,” they said.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net Last Updated: March 10, 2009 13:43 EDT
http://www.bloomberg.com/apps/news?pid=20601102&refer=uk&sid=adCmriDF1wc8
By Matthew Brown
March 10 (Bloomberg) -- The pound fell to its weakest in more than five weeks against the euro after Britain’s housing sales slipped to the lowest level since at least 1978 and manufacturing shrank the most in four decades.
The U.K. currency dropped for a third day versus the 16- nation currency as the Bank of England prepared to print money to buy assets as part of a quantitative easing policy. The average number of transactions in a survey of real-estate agents and surveyors fell to 9.5 per respondent in the quarter through February, the least since the data began three decades ago, the Royal Institution of Chartered Surveyors said today.
“Investors are saying we don’t like the banking situation in the U.K., the housing data was bad, and we’re nervous about the economy,” said Jeremy Stretch, a senior currency strategist in London at Rabobank International. “Quantitative easing is about to begin, and all these factors tell us to stand aside and wait until it gets cheaper.”
The pound weakened to 92.33 pence per euro by 5:20 p.m. in London, from 91.53 yesterday. It slipped to 92.48 pence earlier, the lowest level since Jan. 29. Against the dollar, the currency was little changed at $1.3784.
Factory production dropped 2.9 percent in January from December, the Office for National Statistics in London said. Economists in a Bloomberg survey predicted a 1.4 percent decline. Manufacturing shrank 6.4 percent in the three months through January, the most since records began in 1968.
Quantitative Easing
The Bank of England will seek to buy 2 billion pounds of gilts in an operation for its asset-purchase facility on March 11, it said last week. Policy makers said March 5 they will acquire as much as 150 billion pounds of government and corporate assets, the first central bank to adopt quantitative easing since the Bank of Japan in the 1990s.
“With the Bank of England taking far more aggressive steps than any other central bank, bar possibly the Federal Reserve, the pound remains vulnerable to the downside,” Derek Halpenny, the London-based European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a note today.
Policy makers cut the nation’s benchmark interest rate 4.5 percentage points to an all-time low of 0.5 percent since October as the economy headed for its worst recession since World War II. Gross domestic product contracted 1.5 percent in the fourth quarter, the most since 1980, a report on Feb. 25 showed.
The pound may still strengthen to 89 pence per euro in the next three months as the recession in the euro region economy deepens, Stretch said. For Merrill Lynch & Co., the euro’s gain against the pound may have gone to far.
Gilts Rise
“We will probably look to fade the move higher in the euro- pound if and when the short-term interest-rate spread-compression trend resumes,” wrote Steven Pearson, a London-based strategist at Merrill Lynch. “It is worth noting that with the Bank of England bank rate having likely reached its terminal level, pound-euro may now start to trade well during risk aversion.”
U.K. government bonds rose, with the yield on the 10-year gilt falling one basis point to 3.11 percent. The 4.5 percent security due March 2019 advanced 0.09, or 90 pence per 1,000- pound face amount, to 111.82. Two-year gilt yields slipped one basis point to 1.32 percent. Bond yields move inversely to prices.
The U.K. Treasury today sold 3 billion pounds of 4.5 percent bonds maturing in 2019. The sale received bids 2.06 times the amount offered, the Debt Management Office said, compared with an average 1.9 times at the last three auctions of the securities.
‘Carried Away’
“Investors are getting carried away with the euphoria surrounding quantitative easing,” said Ian Williams, chief executive officer of Charteris Portfolio Managers in London. “The Bank of England is a buyer of gilts, but the U.K. government is still a net seller of gilts. The compression in yields when the penny drops is going to be difficult to maintain, and the implications of quantitative easing are inflationary.”
The yield on the 10-year gilt may rise to 3.25 percent by the end of April, said Williams, whose U.K. government-bond fund beat all its competitors in January, according to data from Lipper and given to Bloomberg by Charteris.
Ten-year gilts may keep gaining, according to technical strategists at Barclays Plc.
“Bigger picture, the secular bull trend remains intact, particularly following the recent failure to overcome 3.82 percent-area support,” Barclays Capital analysts including Jordan Kotick in New York wrote in a report. The yield may move toward 2.70 percent “medium term,” they said.
To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net Last Updated: March 10, 2009 13:43 EDT
http://www.bloomberg.com/apps/news?pid=20601102&refer=uk&sid=adCmriDF1wc8
Monday, 2 February 2009
Intervening to prop up pound is 'recipe for failure', says Brown
Intervening to prop up pound is 'recipe for failure', says Brown
PM expected to admit today that he should have been tougher with 'freewheeling bankers'
By Sean O'Grady, Jane Merrick and Brian BradySunday, 1 February 2009
'We do not target our exchange rate': Gordon Brown at the World Economic Forum in Davos yesterday
Related Articles
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Gordon Brown has indicated that he will not intervene to prevent the pound sinking still further against the dollar, the euro and other major currencies.
Speaking at the World Economic Forum in Davos, Switzerland, the Prime Minister suggested that the fate of sterling was a matter for the markets alone: "We do not target our exchange rate." That, he added, would be a "recipe for failure", as it had been when governments tried to "shadow the Deutschmark" and joined the European Exchange Rate Mechanism in the late 1980s and early 1990s.
Mr Brown's comments seem certain to push sterling lower, and may see it hit parity with the euro.
At the same time, Caroline Flint, the Europe minister, appeared to rule out British entry into the single currency, even in the long term. She told The Independent on Sunday: "We are prepared to look at the issues around the euro. This doesn't mean, in principle, that we think we have a journey to the euro. It's about whether it would work for the British economy." Her remarks appeared to be at odds with the position of the Business Secretary, Lord Mandelson, who he said this month that joining the euro remained a long-term policy objective.
Mr Brown will today take some responsibility for failing to get tough with freewheeling banks when he was Chancellor – but he will stop short of a full apology for his role in the recession. "We're toughening up the regulatory system," he will tell BBC1's Politics Show, a move No 10 hopes will tackle claims that he refuses to accept any blame for Britain's plight. "That is an acceptance that it wasn't strong enough to meet what was, effectively... a global financial freezing up."
Market fears centre on the scale of the Government's debts now being piled up, and the possibility that the Treasury will have to take on trillions of pounds-worth of liabilities if the banking system continues to falter. Many liabilities are in foreign currency and large in relation to the UK's GDP, prompting comparison with Iceland, which in effect went bust because of its overextended banks. Economist Willem Buiter has joked about London becoming "Reykjavik-on-Thames".
There are also worries about the state of the economy, and the accumulating bad debts that will accumulate as the UK enters its worst recession in 60 years. The IMF last week forecast that the British economy would shrink by 2.8 per cent in 2009, its worst showing since the Second World War, although Bank of England and Treasury officials seem relaxed about the decline of the pound, in the hope this will boost exports, although there is little evidence of that so far.
Showing considerable irritation about remarks from international investors such as Jim Rogers, who have sold sterling and declared the UK "finished", the Prime Minister said: "We are not going to build our policies around self-interested speculators."
Mr Rogers said recently that he has sold all his sterling assets. And on Tuesday, the billionaire investor George Soros, who "broke the Bank of England" during the 1992 ERM crisis, said he too had been selling, sterling over the past 12 months: "Sterling did fall from around $2 to about $1.40 and at that level the risk-reward balance is no longer compelling. I'm not saying it won't fall any more though – it will continue to fluctuate." Against a basket of currencies, the pound has lost about a third of its value in a year.
There are also concerns in some European circles that the British Government is using the hefty depreciation in the pound against the euro as a sort of stealth protectionism. Mr Brown and the German Chancellor Angela Merkel have warned in Davos about the "retreat to protectionism".
http://www.independent.co.uk/news/uk/politics/intervening-to-prop-up-pound-is-recipe-for-failure-says-brown-1522528.html
PM expected to admit today that he should have been tougher with 'freewheeling bankers'
By Sean O'Grady, Jane Merrick and Brian BradySunday, 1 February 2009
'We do not target our exchange rate': Gordon Brown at the World Economic Forum in Davos yesterday
Related Articles
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John Rentoul: We all throw a tantrum once in a while
Hamish McRae: The recovery will be slow, difficult and unlike any we've known before
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Union urges Government to take utilities away from private equity and hedge funds
So hip, it hurts. Can Puma leave the recession for dead?
An army of altruists: VSO boosted by record rise in recruits
It's an ill wind... UK tourism finds recession is so bracing!
Margareta Pagano: Obama is the one to lead us out of this mess
Lenders cite squeeze on savers as they seek to limit mortgage cuts
Price falls open the door for first-time buyers
Editor-At-Large: Look who's worst off in recession – women, of course
Gordon Brown has indicated that he will not intervene to prevent the pound sinking still further against the dollar, the euro and other major currencies.
Speaking at the World Economic Forum in Davos, Switzerland, the Prime Minister suggested that the fate of sterling was a matter for the markets alone: "We do not target our exchange rate." That, he added, would be a "recipe for failure", as it had been when governments tried to "shadow the Deutschmark" and joined the European Exchange Rate Mechanism in the late 1980s and early 1990s.
Mr Brown's comments seem certain to push sterling lower, and may see it hit parity with the euro.
At the same time, Caroline Flint, the Europe minister, appeared to rule out British entry into the single currency, even in the long term. She told The Independent on Sunday: "We are prepared to look at the issues around the euro. This doesn't mean, in principle, that we think we have a journey to the euro. It's about whether it would work for the British economy." Her remarks appeared to be at odds with the position of the Business Secretary, Lord Mandelson, who he said this month that joining the euro remained a long-term policy objective.
Mr Brown will today take some responsibility for failing to get tough with freewheeling banks when he was Chancellor – but he will stop short of a full apology for his role in the recession. "We're toughening up the regulatory system," he will tell BBC1's Politics Show, a move No 10 hopes will tackle claims that he refuses to accept any blame for Britain's plight. "That is an acceptance that it wasn't strong enough to meet what was, effectively... a global financial freezing up."
Market fears centre on the scale of the Government's debts now being piled up, and the possibility that the Treasury will have to take on trillions of pounds-worth of liabilities if the banking system continues to falter. Many liabilities are in foreign currency and large in relation to the UK's GDP, prompting comparison with Iceland, which in effect went bust because of its overextended banks. Economist Willem Buiter has joked about London becoming "Reykjavik-on-Thames".
There are also worries about the state of the economy, and the accumulating bad debts that will accumulate as the UK enters its worst recession in 60 years. The IMF last week forecast that the British economy would shrink by 2.8 per cent in 2009, its worst showing since the Second World War, although Bank of England and Treasury officials seem relaxed about the decline of the pound, in the hope this will boost exports, although there is little evidence of that so far.
Showing considerable irritation about remarks from international investors such as Jim Rogers, who have sold sterling and declared the UK "finished", the Prime Minister said: "We are not going to build our policies around self-interested speculators."
Mr Rogers said recently that he has sold all his sterling assets. And on Tuesday, the billionaire investor George Soros, who "broke the Bank of England" during the 1992 ERM crisis, said he too had been selling, sterling over the past 12 months: "Sterling did fall from around $2 to about $1.40 and at that level the risk-reward balance is no longer compelling. I'm not saying it won't fall any more though – it will continue to fluctuate." Against a basket of currencies, the pound has lost about a third of its value in a year.
There are also concerns in some European circles that the British Government is using the hefty depreciation in the pound against the euro as a sort of stealth protectionism. Mr Brown and the German Chancellor Angela Merkel have warned in Davos about the "retreat to protectionism".
http://www.independent.co.uk/news/uk/politics/intervening-to-prop-up-pound-is-recipe-for-failure-says-brown-1522528.html
Friday, 23 January 2009
Falling Pound Raises Fears of Stagnation
Falling Pound Raises Fears of Stagnation
By JULIA WERDIGIER and NELSON D. SCHWARTZ
Published: January 21, 2009
LONDON — An island nation that bulked up on debt and lived beyond its means. A plunging currency. And a financial system edging toward nationalization.
Multimedia
Graphic
A Tumbling Currency
CNBC Video: Trichet Hints at Further Euro Rate Cut
Related
When Governments Take Over Industries in Trouble (January 22, 2009)
Times Topics: Credit Crisis -- The Essentials
With the pound at a multidecade low and British banks requiring ever-larger injections of taxpayer cash, it is no wonder that observers have started to refer to London as “Reykjavik-on-Thames.”
While that judgment seems exaggerated, there are uncomfortable parallels between Iceland’s recent financial downfall and Britain’s trajectory. Equally important, news that widening bank losses in Britain have necessitated another round of government life support provides a stark example to the United States.
Washington’s attempts to stabilize financial institutions have failed so far, as well. And now the Obama administration, along with the rest of the world, could watch Britain to see what a bank nationalization might look like, and what it might suggest for American banks.
Ordinary Britons have a more basic worry. After relishing the boom that transformed the drab United Kingdom into Cool Britannia, they fear that the disheartening economic stagnation of the 1970s might return.
The pound, a symbol of British independence from the Continent that is revered nearly as much as the queen, is now down nearly 29 percent against the dollar from a year ago.
There has been a steady drumbeat of gloomy economic news for months, but the mood in Britain has darkened starkly in recent days.
On Monday, Royal Bank of Scotland warned that its 2008 losses could hit £28 billion, or $38 billion, even as Prime Minister Gordon Brown announced a second bailout package for the troubled banking sector worth tens of billions of pounds. Ultimately, the British rescue effort could cost at least £350 billion, with some estimates ranging far higher.
But in contrast to last autumn, when Mr. Brown’s first bailout plan was highly praised, this package has been greeted with anxiety. While few question the need for a quick response, the sheer scale of the borrowing being discussed, as well as the existing debt levels among corporations and consumers alike, alarms many analysts and economists.
“I fully back what the government is doing, but there is a risk of being Iceland on the Thames,” said Will Hutton, an economic expert who is executive vice chairman of the Work Foundation, a nonprofit research firm. “And the more sterling falls, the greater our liabilities in terms of what we owe.”
The pound fell to $1.3618 on Wednesday, its lowest level against the dollar since September 1985, before recovering to $1.3922.
Even more than their American counterparts, borrowers in Britain turned to local banks to fuel a real estate boom that was as much a national pastime as a rational decision about what to buy. Household debt as a percentage of disposable income hit 177 percent in 2007, compared with 141 percent in the United States.
Now, with both housing prices dropping and institutions like the Royal Bank of Scotland buckling, the British economic outlook looks even bleaker than the landscape in the United States and the euro zone, the countries that use the euro.
The British economy is expected to shrink by 2.9 percent this year, compared with a 2.6 percent drop in the euro zone and a 2.1 percent contraction in the United States, according to Gilles Moëc, senior economist with the Bank of America in London.
To make matters worse, Mr. Moëc said, Britain is facing a wave of deficit spending, as tax receipts fall and the costs of unemployment benefits and other services rise. He predicts the budget deficit will equal 9.4 percent of gross domestic product in 2009, compared with 4.9 percent in the euro zone and 8.4 percent in the United States.
“It’s scary,” he said. “It reminds me of what you could find in southern Europe 15 years ago, during the worst years in Italy or Greece.”
British stocks have followed the pound lower in recent days as well. The benchmark FTSE index has fallen 2.1 percent this week, led by a plunge in the shares of many leading banks.
The government already controls a majority share in Royal Bank of Scotland, but the prospect of a full nationalization of the bank has alarmed investors, and shares of RBS have plunged 64 percent in the last three days. The prospect of nationalization haunts other troubled banks as well — Barclays is down 33 percent and Lloyds Banking Group is off 54 percent.
As in Iceland, banks, real estate and other financial services boomed in London in recent years, even as other swaths of the economy withered. In recent years, this sector has been responsible for about half of total job growth in Britain even though it accounts for only about 30 percent of the economy, according to Peter Dixon, economist for Britain at Commerzbank in London.
Consumers were also lulled into taking on more and more debt by the unusually steady economic expansion Britain enjoyed until last year, Mr. Dixon said. Growth averaged 2.7 percent annually over the last decade. “The last 10 years were phenomenally stable, with volatility at its lowest point since the 19th century,” he said.
But that prosperity camouflaged a steadily weakening manufacturing base, unlike in Germany, where the industrial sector is a relative counterweight to the outsize problems of financial firms.
For all the debt weighing down British banks, though, Iceland’s situation was far worse before the government was forced to nationalize the banking sector last fall as the krona collapsed.
British bank assets total about 4.5 times the country’s gross domestic product, but in Iceland they were 10 times as large as the G.D.P., Mr. Hutton said.
That does not mean there is not a price to pay for Britons even now. The pound has plunged before and each time is remembered as a humiliating experience that scarred the nation.
In 1976, the government was forced to approach the International Monetary Fund for help after the pound dropped below $2 for the first time. In 1992, the pound dropped out of the European exchange rate mechanism as interest rates hit 15 percent and Britain was in a recession.
A weak pound also weighs on the psyche of the British, most of whom are reducing spending while watching a flood of euro- and dollar-rich tourists hunt for bargains in their shops.
Jeremy Stretch, senior currency strategist at Rabobank in London, said Britons might learn that a weak pound can be helpful.
A weaker pound would make British exporters more competitive, for example, thus reducing Britain’s dependence on the City, as London’s financial district is known, for future growth.
Mr. Stretch also said that Britain’s current economic problems were different from the 1970s and 1990s because it was far from alone this time around.
“The salvation of the pound is that its problem is not a pound-specific problem,” he said. “At the moment, we’re looking the ugliest. But if you sell the pound, what will you buy?”
Julia Werdigier reported from London and Nelson D. Schwartz from Paris.
http://www.nytimes.com/2009/01/22/business/worldbusiness/22pound.html?_r=1&ref=todayspaper
By JULIA WERDIGIER and NELSON D. SCHWARTZ
Published: January 21, 2009
LONDON — An island nation that bulked up on debt and lived beyond its means. A plunging currency. And a financial system edging toward nationalization.
Multimedia
Graphic
A Tumbling Currency
CNBC Video: Trichet Hints at Further Euro Rate Cut
Related
When Governments Take Over Industries in Trouble (January 22, 2009)
Times Topics: Credit Crisis -- The Essentials
With the pound at a multidecade low and British banks requiring ever-larger injections of taxpayer cash, it is no wonder that observers have started to refer to London as “Reykjavik-on-Thames.”
While that judgment seems exaggerated, there are uncomfortable parallels between Iceland’s recent financial downfall and Britain’s trajectory. Equally important, news that widening bank losses in Britain have necessitated another round of government life support provides a stark example to the United States.
Washington’s attempts to stabilize financial institutions have failed so far, as well. And now the Obama administration, along with the rest of the world, could watch Britain to see what a bank nationalization might look like, and what it might suggest for American banks.
Ordinary Britons have a more basic worry. After relishing the boom that transformed the drab United Kingdom into Cool Britannia, they fear that the disheartening economic stagnation of the 1970s might return.
The pound, a symbol of British independence from the Continent that is revered nearly as much as the queen, is now down nearly 29 percent against the dollar from a year ago.
There has been a steady drumbeat of gloomy economic news for months, but the mood in Britain has darkened starkly in recent days.
On Monday, Royal Bank of Scotland warned that its 2008 losses could hit £28 billion, or $38 billion, even as Prime Minister Gordon Brown announced a second bailout package for the troubled banking sector worth tens of billions of pounds. Ultimately, the British rescue effort could cost at least £350 billion, with some estimates ranging far higher.
But in contrast to last autumn, when Mr. Brown’s first bailout plan was highly praised, this package has been greeted with anxiety. While few question the need for a quick response, the sheer scale of the borrowing being discussed, as well as the existing debt levels among corporations and consumers alike, alarms many analysts and economists.
“I fully back what the government is doing, but there is a risk of being Iceland on the Thames,” said Will Hutton, an economic expert who is executive vice chairman of the Work Foundation, a nonprofit research firm. “And the more sterling falls, the greater our liabilities in terms of what we owe.”
The pound fell to $1.3618 on Wednesday, its lowest level against the dollar since September 1985, before recovering to $1.3922.
Even more than their American counterparts, borrowers in Britain turned to local banks to fuel a real estate boom that was as much a national pastime as a rational decision about what to buy. Household debt as a percentage of disposable income hit 177 percent in 2007, compared with 141 percent in the United States.
Now, with both housing prices dropping and institutions like the Royal Bank of Scotland buckling, the British economic outlook looks even bleaker than the landscape in the United States and the euro zone, the countries that use the euro.
The British economy is expected to shrink by 2.9 percent this year, compared with a 2.6 percent drop in the euro zone and a 2.1 percent contraction in the United States, according to Gilles Moëc, senior economist with the Bank of America in London.
To make matters worse, Mr. Moëc said, Britain is facing a wave of deficit spending, as tax receipts fall and the costs of unemployment benefits and other services rise. He predicts the budget deficit will equal 9.4 percent of gross domestic product in 2009, compared with 4.9 percent in the euro zone and 8.4 percent in the United States.
“It’s scary,” he said. “It reminds me of what you could find in southern Europe 15 years ago, during the worst years in Italy or Greece.”
British stocks have followed the pound lower in recent days as well. The benchmark FTSE index has fallen 2.1 percent this week, led by a plunge in the shares of many leading banks.
The government already controls a majority share in Royal Bank of Scotland, but the prospect of a full nationalization of the bank has alarmed investors, and shares of RBS have plunged 64 percent in the last three days. The prospect of nationalization haunts other troubled banks as well — Barclays is down 33 percent and Lloyds Banking Group is off 54 percent.
As in Iceland, banks, real estate and other financial services boomed in London in recent years, even as other swaths of the economy withered. In recent years, this sector has been responsible for about half of total job growth in Britain even though it accounts for only about 30 percent of the economy, according to Peter Dixon, economist for Britain at Commerzbank in London.
Consumers were also lulled into taking on more and more debt by the unusually steady economic expansion Britain enjoyed until last year, Mr. Dixon said. Growth averaged 2.7 percent annually over the last decade. “The last 10 years were phenomenally stable, with volatility at its lowest point since the 19th century,” he said.
But that prosperity camouflaged a steadily weakening manufacturing base, unlike in Germany, where the industrial sector is a relative counterweight to the outsize problems of financial firms.
For all the debt weighing down British banks, though, Iceland’s situation was far worse before the government was forced to nationalize the banking sector last fall as the krona collapsed.
British bank assets total about 4.5 times the country’s gross domestic product, but in Iceland they were 10 times as large as the G.D.P., Mr. Hutton said.
That does not mean there is not a price to pay for Britons even now. The pound has plunged before and each time is remembered as a humiliating experience that scarred the nation.
In 1976, the government was forced to approach the International Monetary Fund for help after the pound dropped below $2 for the first time. In 1992, the pound dropped out of the European exchange rate mechanism as interest rates hit 15 percent and Britain was in a recession.
A weak pound also weighs on the psyche of the British, most of whom are reducing spending while watching a flood of euro- and dollar-rich tourists hunt for bargains in their shops.
Jeremy Stretch, senior currency strategist at Rabobank in London, said Britons might learn that a weak pound can be helpful.
A weaker pound would make British exporters more competitive, for example, thus reducing Britain’s dependence on the City, as London’s financial district is known, for future growth.
Mr. Stretch also said that Britain’s current economic problems were different from the 1970s and 1990s because it was far from alone this time around.
“The salvation of the pound is that its problem is not a pound-specific problem,” he said. “At the moment, we’re looking the ugliest. But if you sell the pound, what will you buy?”
Julia Werdigier reported from London and Nelson D. Schwartz from Paris.
http://www.nytimes.com/2009/01/22/business/worldbusiness/22pound.html?_r=1&ref=todayspaper
U.K. Pound Serves as Omen for Dollar
JANUARY 22, 2009
U.K. Pound Serves as Omen for Dollar
As the British pound continues to sink, its travails are a cautionary tale for the U.S. dollar.
The U.S. and the U.K. face very similar predicaments, from a deepening recession to a damaged financial system. Both are orchestrating massive bank bailouts and attempting to assist struggling homeowners. Both are ramping up government spending even as they rely on financing from overseas investors. And both countries have central banks that have slashed interest rates and opened the door to unconventional ways of stimulating the economy.
Yet their currencies have headed in opposite directions. On Wednesday, the British pound tumbled to a 23-year low against the dollar, briefly buying just $1.362, down from over $2 only six months ago. The pound also hit a new all-time low versus the Japanese yen. It got a minor boost in late afternoon trading, following a report that finance ministers from major industrialized nations will discuss the currency's weakness when they meet next month.
By contrast, the dollar managed to strengthen against a host of currencies as the financial crisis intensified last fall. It has also surged ahead in recent days, particularly versus the pound and the euro.
Unlike the pound, the dollar is being buttressed by its unique status as the world's reserve currency and the vehicle for transactions in U.S. financial markets, including Treasury bonds. That means investors often seek out the dollar as fears rise, sometimes in spite of their concerns about the U.S. economy.
"The dollar is still benefiting by default" as investors run from riskier bets, says Lisa Scott-Smith of Millennium Global Investments, a London currency manager. "The pound isn't a natural reserve currency in the way that the dollar would be."
The euro also has flagged in recent weeks, as concerns have risen over the creditworthiness of some of the more indebted countries that use the currency. But it has suffered less than the pound, a sign that investors may be gravitating toward the largest, most highly traded currencies as nearly all economies stumble.
Meanwhile, there's little light ahead for the beleaguered pound, say some currency experts. The economic news is "horrendous," says Neil Mellor, a London-based currency strategist at the Bank of New York Mellon. "There is very good reason for panic at the moment."
In one worrisome sign, investors not only dumped the pound earlier this week, but also shed U.K. stocks and government bonds, sending their yields up. Such a combination, if sustained, would raise the fear that investors are exiting from a host of U.K. assets, creating a vicious cycle that is difficult to arrest.
That's also the scenario that some worry might await the dollar and U.S. bond yields, should appetite from overseas investors wane.
These days, policy makers are inclined to let their currencies weaken "until such a time as other asset markets flag that enough is enough," says Alan Ruskin, chief international strategist at RBS Greenwich Capital. Given that the moves in British government bond yields aren't yet extreme by recent standards, "I don't think we've quite reached that point in the U.K."
In a note on Wednesday, Goldman Sachs analysts pointed out that recent moves in the pound and U.K. bond yields were more typical for emerging markets with weak fundamentals. However, they added, the analogy isn't justified over the long term. Indeed, the firm recommended that investors buy the pound as well as U.K. bonds.
While the dollar continues to benefit from its unique position in financial markets for now, it is far from clear that the resilience will last. "Right now the market is beating up on the pound, but at some point it will look for something else to pick on," says Paul Mackel, a currency strategist at HSBC in London.
The fact that the Federal Reserve stands ready to use a host of unconventional measures to flood the economy with liquidity in an effort to stimulate growth "could hurt the dollar quite badly" later this year, he says.
The U.S. and the U.K. face very similar predicaments, from a deepening recession to a damaged financial system. Both are orchestrating massive bank bailouts and attempting to assist struggling homeowners. Both are ramping up government spending even as they rely on financing from overseas investors. And both countries have central banks that have slashed interest rates and opened the door to unconventional ways of stimulating the economy.
Yet their currencies have headed in opposite directions. On Wednesday, the British pound tumbled to a 23-year low against the dollar, briefly buying just $1.362, down from over $2 only six months ago. The pound also hit a new all-time low versus the Japanese yen. It got a minor boost in late afternoon trading, following a report that finance ministers from major industrialized nations will discuss the currency's weakness when they meet next month.
By contrast, the dollar managed to strengthen against a host of currencies as the financial crisis intensified last fall. It has also surged ahead in recent days, particularly versus the pound and the euro.
Unlike the pound, the dollar is being buttressed by its unique status as the world's reserve currency and the vehicle for transactions in U.S. financial markets, including Treasury bonds. That means investors often seek out the dollar as fears rise, sometimes in spite of their concerns about the U.S. economy.
"The dollar is still benefiting by default" as investors run from riskier bets, says Lisa Scott-Smith of Millennium Global Investments, a London currency manager. "The pound isn't a natural reserve currency in the way that the dollar would be."
The euro also has flagged in recent weeks, as concerns have risen over the creditworthiness of some of the more indebted countries that use the currency. But it has suffered less than the pound, a sign that investors may be gravitating toward the largest, most highly traded currencies as nearly all economies stumble.
Meanwhile, there's little light ahead for the beleaguered pound, say some currency experts. The economic news is "horrendous," says Neil Mellor, a London-based currency strategist at the Bank of New York Mellon. "There is very good reason for panic at the moment."
In one worrisome sign, investors not only dumped the pound earlier this week, but also shed U.K. stocks and government bonds, sending their yields up. Such a combination, if sustained, would raise the fear that investors are exiting from a host of U.K. assets, creating a vicious cycle that is difficult to arrest.
That's also the scenario that some worry might await the dollar and U.S. bond yields, should appetite from overseas investors wane.
These days, policy makers are inclined to let their currencies weaken "until such a time as other asset markets flag that enough is enough," says Alan Ruskin, chief international strategist at RBS Greenwich Capital. Given that the moves in British government bond yields aren't yet extreme by recent standards, "I don't think we've quite reached that point in the U.K."
In a note on Wednesday, Goldman Sachs analysts pointed out that recent moves in the pound and U.K. bond yields were more typical for emerging markets with weak fundamentals. However, they added, the analogy isn't justified over the long term. Indeed, the firm recommended that investors buy the pound as well as U.K. bonds.
While the dollar continues to benefit from its unique position in financial markets for now, it is far from clear that the resilience will last. "Right now the market is beating up on the pound, but at some point it will look for something else to pick on," says Paul Mackel, a currency strategist at HSBC in London.
The fact that the Federal Reserve stands ready to use a host of unconventional measures to flood the economy with liquidity in an effort to stimulate growth "could hurt the dollar quite badly" later this year, he says.
Write to Joanna Slater at joanna.slater@wsj.com
Pound falls to lowest level against the dollar since 1985
Pound falls to lowest level against the dollar since 1985
The pound fell to its lowest level against the dollar since 1985 last night amid growing fears that the Government will have to nationalise high-street banks.
By Robert Winnett
Last Updated: 8:08PM GMT 21 Jan 2009
Pound falls to lowest level against the dollar since 1985
One pound now buys less than $1.37 - compared to more than $2 last summer - after international currency speculators moved in to profit from concerns over the British economy.
One pound now buys less than $1.37 - compared to more than $2 last summer - after international currency speculators moved in to profit from concerns over the British economy.
Experts predict it is likely to fall to $1.30 or below in the next few days.
Sterling also fell sharply against the Euro and reached a record low against the Japanese yen.
The falls have come following sharp reductions in the share values of major high-street banks such as Barclays, Lloyds and Royal Bank of Scotland (RBS).
This has led to fears that several banks may have to be nationalised which could have devastating effects on the public finances. The assets of RBS and Lloyds Banking Group are in excess of the total value of the British economy and experts believe that billions of pounds of their debts may never be repaid.
Mervyn King, the Governor of the Bank of England, has also indicated that more money may effectively have to be printed in the next few months to kick-start the British economy. Analysts at Barclays predicted yesterday that interest rates will soon be cut to zero percent.
Jim Rogers, a former partner of George Soros, the speculator who made $1 billion from the collapse of sterling on black Wednesday in September 1992, yesterday stepped up his attack on the British economy.
He said that the City of London was now "finished" and that the UK had nothing to offer once North Sea oil reserves ran out. "It's simple, the UK has nothing to sell," he said.
Another currency speculator added that "the UK is imploding" last night.
Government ministers have repeatedly refused to comment on the reduction in the value of the pound. However, the French finance minister yesterday called on the Bank of England to intervene.
Christine Lagarde, the French finance minister, said: "The Bank of England does what it can, but its monetary policy, its rate management isn't very efficient in providing more support for the British currency. I believe it's in its interests to support it a little more."
However, one of the world's biggest investment banks said that the fall in the value of the pound had been "overplayed". Goldman Sachs said it was "bullish" on the pound and said it believed the "picture in the UK is not as poor as many people try to portray."
:: How the exchange rate affects shoppers:
An 8GB Ipod Nano priced $149, set a British shopper back £76.18 one year ago, but now costs them £108.22.
A pair of men’s Abercrombie & Fitch jeans priced $79.50, set a British shopper back £40.65 one year ago, but now costs them £57.74.
A double room at the Waldorf Astoria Hotel in New York priced $259, set a British holidaymaker back £132.43 one year ago, but now costs them £188.12.
A one-day adult ski pass in Aspen priced $96, set a British holidaymaker back £49.08 one year ago, but now costs them £69.73.
A one-day admission ticket to Universal Studios Hollywood priced $67, set a British tourist back £34.26 one year ago, but now costs them £48.66.
Note: Calculated using exchange rates for 21/01/08: £1 = $1.9558; 21/01/09: £1 = $1.3768
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