A tale of two Cities as pound dies and FTSE flies

Sterling dives to well under a Euro, but the market doesn't care - it's on the up again...

Last Updated: 31 Aug 2010

Mixed messages from the financial sector today, as the pound plummets to a five month low against the Euro of only 1.10, while the FTSE soars past 5,150.

The latest bout of pain for the battered quid – last week it fell nearly three per cent on fears that commercial-deposit interest rates would be cut - is on the back of a rather dusty technical article in the Bank of England’s Quarterly Review.  The piece suggests – not unreasonably – that the financial crisis may have led to a permanent downward-revision in the value of sterling by the international investment community. 

Hardly surprising then that our currency should take a caning as a result - if even the Bank of England thinks sterling is on the way down, who’s going to argue? But Bank officials were apparently taken aback at the reaction, claiming that the piece was not meant to be a policy forecast. Presumably we can deduce from that that when the Bank is forecasting, it takes a rather more glass-half-full approach.

So why does this all matter? As well as putting the price of foreign goods and travel up even further – bad news for all this year’s staycationers who are now desperate to go abroad – a permanent drop in the value of the pound would have all kinds of long-term economic consequences.  Not the least of which would be its effects on our ability to maintain the trade deficit.

For the past decade, the influx of cash into the UK from foreign investors buying sterling assets has compensated for the net outflow of cash as a result of our importing more stuff than we export. But as the currency falls and interest rates stay low, those investors may well look elsewhere – so the theory goes.

But on the other hand, a falling currency is good news for endebted governments, as it magically reduces the value of our debt pile - as expressed in other currencies -without the bothersome business of actually having to pay any of it off.  So the article may well amount to a tacit admission of just such a new low-pound reality by the Bank. ‘Get used to it’ seems to be the subtext.

As far as the stockmarket is concerned however, it’s onward and upwards. Oil and mining shares led the charge as rising commodity prices once again make the extractive industries look like a safe bet. This morning the FTSE’s up again and headed for 5,200 – good news for all those battered pension schemes out there, if only they can keep it up.


In today's bulletin

Dodgy builders fined £130m for price-fixing scam

'Magic circle' lawyers lose their power as fees get slashed

A tale of two Cities as pound dies and FTSE flies

Dell pays $3.9bn for Perot Systems

Nectar card tycoon Mills sets sail for America's Cup



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