The Slumping Pound - Why Does it Matter?

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.

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.