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Nickelless
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 Posted - 12/10/2008 : 18:05:50
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The pound fell to a record low against the euro this morning, nearing parity with sterling as fears about the strength of the British economy gathered pace.
The euro climbed to 87.79p against the pound on the currency markets, building on a previous high of 87.73p. At the same time, sterling hit $1.4765 against the dollar.
The British currency has been steadily weakening in the midst of the economic downturn. Over the past 12 months, sterling has fallen 17.4 per cent against the euro and 27.1 per cent against the dollar.
The National Institute of Economic and Social Research (NIESR), an influential think-tank, predicted today that the economy would shrink by one per cent or more this winter as it emerged that British industry is contracting at the fastest pace since 1991.
The speed at which the economy is shrinking has doubled to at least one per cent in the past three months, from an already severe 0.5 per cent officially reported for the third quarter, according to NIESR.
The UK economy is expected to officially fall into recession in the fourth quarter of this year — the technical definition of a recession is two consecutive quarters of negative growth.
The most recent release of worrying economic data showed that industrial production, which counts for just under a fifth of Britain's GDP, fell by 1.7 per cent in October, the biggest slump since January 2003, official figures show.
One London-based trader said this morning that some traders expected the euro to rise to 93p against the pound.
“Technically, sterling is looking very heavy and the product of that is euro-sterling going higher,” the trader said.
The overall value of sterling against a basket of currencies tumbled last week to 80.4p — its lowest point for 13 years — ahead of the latest interest rate move by the Bank of England, which cut rates to a 50-year low of 2 per cent on Thursday.
The falling interest rate is one factor that has driven investors away from the pound, as returns on cash deposited in the UK shrink, as well as concerns over the outlook for the British economy.
Chris Towner, director of FX advisory at HiFX, the foreign exchange specialists, said that, while attention is focused on the new lows of sterling against the euro, the pound has been much weaker in the past against a European currency than its present levels.
In 1996, three years before the introduction of the single currency, the deutschmark soared against the pound, at one stage hitting £1.11.
Germany's economy accounts for a third of the 15-nation eurozone.
"In foreign exchange terms, there is always this fixation on what's going on in Germany, because Germany is seen to be the heartbeat of the European economy," Mr Towner said.
Germany officially fell into recession in November, after a 0.5 per cent contraction in the economy in the third quarter followed a 0.4 per cent contraction earlier this year.
Fears for the vulnerability of the British economy have been more acute because of its exposure to the housing market. While house prices more than doubled in the UK in the decade leading up to the market downturn, Mr Towner said that house price increases in Germany had been "practically non-existent".
Despite figures released yesterday, which showed that the UK trade deficit had widened to £7.8 billion, from £7.4 billion in September, Mr Towner said the weaker pound should ultimately boost exports.
This, with recovery in the housing market and the effect of the Bank's rate cuts, was necessary for the revival of the economy, Mr Towner said.
In the early 1990s, the pound's weakness set the UK on course for 15 years of sustained economic growth. The currency was ejected from the European Exchange Rate Mechanism (ERM) on Black Wednesday in 1992, but Mr Towner said that the pound's weakness that followed enabled the UK to regain its competitiveness.
The argument that, in being penned in by the parameters of the ERM, sterling had become too high, helped George Soros to his successful $10 billion bet against the pound, and his soubriquet — "the man who broke the Bank of England".
Mr Towner added that the current downturn could secure the longer term economic health of the UK.
"It's not a bad thing for economies to go through this pain. We have had 15 years of gain — it's actually quite healthy to see this retraction," he said.
"The quicker we go through the correction, the better, but in a way the deeper the correction the better it will be in the long term."
He argued that it was preferable to face economic difficulties with a weak currency, comparing the UK's position to that of Japan, which relies heavily on exports but has seen the yen strengthen by over 40 per cent in the past 14 months.
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Pound sinks to record low as euro nears parity
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