British Pound Crumbles

The US Dollar is clearly back in rally mode after suffering a setback in December. As shown in the first chart below, the Dollar index has now broken well above its 50-day moving average and appears to be heading back to its November highs. Unfortunately, rallies in the Dollar have recently coincided with declines in riskier assets like equities.

But the bigger news in currencies is the dramatic fall that the British Pound has recently experienced. Today the Pound is suffering another big drop, and as shown in the first chart below, the currency broke below recent support levels as well as the $1.40 mark. And the bottom chart shows just how much the Pound has fallen in such a short period of time. In late 2007, the Pound was trading at record highs versus the US Dollar. Now it is trading very close to its lowest level since 1991. Anyone in the US that has the money to go to England can stay there on the cheapest tab in decades.

Comments

[dieuwer:]

Ergo, buy pound sell dollar?

Jan 20 01:35 PM

[User 265729:]

Next on the chopping block...

The greenback...

Jan 20 01:43 PM

[CloroxCowboy:]

Jokes on you, dieuwer. These guys don't provide any meaningful analysis...just some graphs. I'm sure you can barely fight off the temptation to sign up for their premium service. HA!

Jan 20 01:44 PM

[Crocodilian:]

On Jan 20 01:43 PM curbs-in wrote:

> Next on the chopping block...
>
> The greenback...

Dollar has to go down against some other currency: which? The Euro? The Yen? The Yuan?

Jan 20 03:35 PM

[Consider_this:]

dieuwer is on the right track. It's just that timing's the bitch.

This is a collective race to the bottom. Pretend there're only 2 currencies in the world (pounds and usd):

First a currency, say pounds, will get trashed relative to the other one.

Then USD, will get trashed too, until it sorta catches up with pounds.

Then pound will trash again. Rinse and repeat.

This is how a fiat currency system ends, not by excess of money or lack of goods as goldbugs would have you believe: but by excessive volatility that leads to collapse.

The volatility swing will grow bigger and bigger. Like an unstable system that resonates uncontrollably with increasing power. The swings will eventually kill the fiat currency system, as nobody can trade with wild swings in currency.

Jan 20 03:43 PM

[Crocodilian:]

On Jan 20 03:43 PM Consider_this wrote:

> dieuwer is on the right track. It's just that timing's the bitch.
>
>
> This is a collective race to the bottom. Pretend there're only 2
> currencies in the world (pounds and usd):
>
> First a currency, say pounds, will get trashed relative to the other
> one.
>
> Then USD, will get trashed too, until it sorta catches up with pounds.
>
>
> Then pound will trash again. Rinse and repeat.
>
> This is how a fiat currency system ends, not by excess of money or
> lack of goods as goldbugs would have you believe: but by excessive
> volatility that leads to collapse.
>
> The volatility swing will grow bigger and bigger. Like an unstable
> system that resonates uncontrollably with increasing power. The swings
> will eventually kill the fiat currency system, as nobody can trade
> with wild swings in currency.


That's a very interesting argument. I'm just not sure that its true. Currencies have value only against other currencies. There are some obviously weak currencies -- Willem Buiter had a piece in the FT on the currencies that are too big for the nations behind them-- but there are no obviously strong currencies.

Japan and China _would_ be the best bets, but they both have major issues. Japan actually has a national debt that exceeds ours (%150 of GDP by some measures) and its an export economy; the Yen at these levels is devastating for Japanese business. The Yuan? Also a very tough one-- by rights, it _should_ go up, but China is also a major export power

The Euro has frailties comparable to the US$

The Pound has the problem of the UK banking system being so much larger than the UK economy.

I confess that I have no idea what will happen.

Jan 20 03:56 PM

[sheople:]

Crocodilian, All fiat currencies can fall flat on their face against commodities.

Jan 20 04:26 PM

[Andiroo:]

I moved to the US first time Sept 1992 and left in 1994. When i arrived from the UK i had exchanged my GBPs for USDs at 1=2. Within months it went to 1=1.45 and then slowly recovered over the next decade. I moved back here this summer '08 and once more changed my GBPs in USDs at 1=2 again and once more it has crashed. Having watched this market for 20 years this is a buy signal provided you have a medium term outlook.

Jan 20 04:33 PM

[Crocodilian:]

On Jan 20 04:26 PM sheople wrote:

> Crocodilian, All fiat currencies can fall flat on their face against
> commodities.

Except that hasn't happened, far from it. Its commodities that have cratered.

The "fiat currency" thing is a bit misleading-- any trading system beyond barter is arbitrary. At different times the arbitrary store of value has been gold, packs of cigarettes, sardines . . . none of them have an essential character as a store of wealth.

I'd repeat the question: for a dollar crisis to occur, some other currency has to rise. Which will it be?

Jan 20 04:37 PM

[igggy:]

Easy. Gold will eventually rise above all of the currencies. But that might take a few years.

Jan 20 07:41 PM

[OldLimey:]

It isn't surprising that some folks who look at the speed and depth of sterling's fall see a buying opportunity. You could well be right, but caution is warranted. The economy here is shot to pieces, foreign currency reserves would embarrass a banana republic (thank you, Gordon), and the potential impact on the government's finances and the wider economy should the grotesquely bloated banking system actually fail has Icelandic overtones. Even worse, it'll be at least a year until our own opportunity arrives to lose touch with reality and believe a new leader's wand can wave it all away.

Jan 21 01:59 PM

[driftwood2:]

I was reading that the UK has foreign exchange debt of 413% it's GDP which is 3/4th short term. Could a liquidity crisis hit them like what happened to AIG or BSC? I shudder to think of what might happen is that were to occur. What is the likelihood of this happening?

Jan 21 05:33 PM

[Clavis:]

Next to be shorted will be the Euro, Germany is weak, Spain, Greece and Italy are without substance.
The US $ is heavily supported, that is while the helicopters are manuring greenbacks but as reality bites and Joe buys gold to protect what little he has left and the US $ ceases to be the backbone World currency, it will become unsupportable.

Jan 21 05:58 PM

[DoreenDavis:]

Dr. Lopez Jean Marc recently said: “People expecting the sterling to become strong have to be extraordinary optimists on the long term but I think that sterling is undervalued against the euro and the dollar at this time…I have started investing in it ; But we have to be careful. It’s not easy money.” Dr. Lopez Jean Marc expects the British currency to appreciate during July and August 2009 .

He says currency swings have especially helped his performance.

A dynamic and energetic businessman, Dr. Lopez Jean Marc has extensive experience in the areas of asset management (private equity and portfolio management), business consulting, government and higher education. Presently, Dr. Lopez Jean Marc is the President of A-Venture Capital LLC., an asset management firm situated in Wall Street Manhattan.

In the past, he has advised foreign governments and various businesses, providing both practical advice and analyses in the area of currency risk management and global development. He presently is an advisor to several companies.

Dr. Lopez Jean Marc is a quantitative monetary economist (to include international economics & finance) and is a currency expert.

Aug 05 08:19 PM