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The Slumping Pound - Why Does it Matter?

Geoff Riley

18th September 2022

The external value of sterling against the US dollar has fallen to the lowest level since 1985. £1 now buys only $1.14 in the currency markets. The pound has fallen nearly 22 per cent during 2022.

The Slumping Pound - Why Does it Matter?

So why is the pound falling?

  • Investors tend to buy dollars at times of global economic and political uncertainty.
  • The US Federal Reserve – their central bank – has been more aggressive in raising interest rates – causing some hot money to flow to the USA
  • There are worries the UK economy is entering a deep recession. Investors tend to sell the currencies of countries heading into a downturn
  • Investors are nervous about the government’s plans to allow borrowing and debt to surge to fund their energy crisis plans

Why does it matter?

  • A falling pound makes UK exports cheaper (good news for exporters) but also makes imports dearer, putting upward pressure on inflation
  • This in turn might persuade the Bank of England to continue raising interest rates as a counter-inflationary measure - which then risks making the 2023 recession even deeper
  • Higher import prices (and inflation) will drive costs upwards for business and hit millions of households with even more expensive food & energy bills A weaker £ tends to cause real wages / living standards to fall.

Even with the pound falling, British exporters have yet to see a boost in sales abroad in part because other countries are experiencing slower growth themselves and the damage caused by the post-Brexit introduction of numerous non-tariff barriers.

Some economists are forecasting that sterling might drop as low as £1 = $1.05 in the weeks and months ahead.

I'm old enough to remember studying economics at university when - for a short period - the pound reached parity against the US dollar! Hopefully we don't get there! Yes, a weaker currency is potentially good news for hard-pressed export businesses. But remember that many exports - especially of complex products - require imports and these become more expensive when the dollar gains ground against the pound in the currency markets.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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