British Pound Could be the Biggest Loser in 2008


It seems that this could be the year that the British pound will loose its strength and replace the U.S. dollar as the biggest looser of the currency market.

This year the British pound depreciated 6 percent against the yen, 5 percent versus the Swiss franc and fell more than 6 percent since reaching a record $2.116 against the U.S. dollar in November 2007.  Furthermore, the Sterling dropped almost 10 percent on the Bank of England's trade-weighted index over the last 12 months.

Looking ahead, worries about the recession hitting the British economy combined with the growing problems in the housing market could force the Bank of England to further cut interest rates. Moreover, the same economic fundamentals which have depressed the U.K. economy in the past will continue to weight on the performance of the sterling. In fact, UK's current account deficit, at 5.7 per cent of gross domestic product, is the highest among Group of Seven industrialized countries. Inflation may be also a problem. UK CPI remained steady at 2.1 per cent in December, but higher energy prices could push the headline rate of inflation higher over the next few months.

In fact, during the last few months, the pound has been still well above its long time $1.646 average compared with dollar and still over its long-term average against the yen. Yet, historical data shows that when the pound is overvalued, it has a strong tendency to go down sharply.


Anna Fedec, analyst@tradingeconomics.com
1/17/2008 9:08:02 AM