Pound at weakest level in history against currency basket

While the pound recently traded at a 31-year low against the dollar, and a six-year low against the euro, on Tuesday it hit its weakest level ever against a widely watched basket of trade-weighted currencies.

The Bank of England’s Broad Effective exchange rate index for the pound shows that the currency is now worth less than it was at the height of the 2008-09 financial crisis or in the aftermath of Black Wednesday, when sterling left the European Exchange Rate Mechanism.

The BOE’s indexes go back to 1975. But sterling’s strength at that time, and its former role as the world’s trading currency, suggest that Tuesday’s level was the pound’s weakest level in history against its trading partners.

The Broad Effective exchange rate index is released by the Bank of England daily, based on the previous day’s exchange rates. The index, which measures the pound against dozens of currencies, weighted by how much they trade with the UK, fell to 73.383, a fall off 0.55% from Monday.

Over the last four months, since Britain voted to leave the European Union, the British currency has fallen steeply. The trade-weighted index has dropped by over 15% since June 23, the day of the referendum.

This week, the pound tumbled after UK Prime Minister Theresa May said her government would prioritise immigration over access to the EU’s common market in coming exit negotiations.

On Wednesday, the pound was up slightly against the dollar and euro after the government said it would allow a parliamentary debate on triggering Article 50, the official process for leaving the EU.

In previous decades, the pound fell in two very large devaluations, from $ 4.03 to $ 2.80 in 1949, and from $ 2.80 to $ 2.40 in 1967.

The currency’s fall against its trading partners over the last 70 years has been driven by the growing relative strength of other European currencies. Until the 1960s, 1 pound was worth more than 10 German deutsche marks, but by the 1990s, it fetched fewer than 3 deutsche marks. A pound will currently buy 1.12 euros, the deutsche mark’s successor currency.

Many analysts believe there are further declines to come against global currencies. HSBC forecasts sterling will hit $ 1.20 by the end of this year and $ 1.10 by the end of 2017.

Analysts at Morgan Stanley and JP Morgan expect sterling to reach $ 1.20 and $ 1.21 by the end of 2016, respectively.

The pound’s fall is feeding into the British economy, creating both good and bad effects. Its decline is already stoking inflation, with UK import prices for businesses rising 9.3% year-over-year in August. But the dramatic weakening of the pound can also act as a shock absorber, making British exports more competitive overseas.

“Even beyond Brexit and the loss of investor confidence, there are underlying reasons to believe that sterling might be due a correction,” said Catherine Schenk, professor of international economic history at the University of Glasgow who has written books on sterling’s 20th century decline.

The UK’s large current account deficit, worth 5.9% of GDP, is one such reason. The deficit means the UK brings in less money from overseas trade, investment income and remittances each year than it sends abroad. The difference must be made up with international investors purchasing UK assets, and any reluctance to do so will weaken the pound.

Write to Mike Bird at Mike.Bird@wsj.com

This article was first published by The Wall Street Journal

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