Monday, October 27, 2008

Reasons for Sterling devaluation - 2008

Why Pound Sterling fell in 2008
In 2008, we saw a dramatic fall in the value of the Pound (25%)

The reasons for the fall in the value of the Pound was

1. Negative economic growth 

Source: ONS

  • This graph of economic growth shows how quickly the UK economy has deteriorated during 2008/09. It was a deeper recession than the great depression It explains why the MPC cut interest rates by 0.5%.
  • Lower UK interest rates mean it is less attractive to save in the UK, reducing demand for Pound Sterling. Though it should be mentioned other countries cut their interest rates too.
  • The UK economy was hit by credit crunch more than other economies, due to the UK's exposure to the financial sector. This explains some of the relative weakness of the UK currency compared to others.
  • Another reason for the strength of the dollar against the Pound, was the growing uncertainty of emerging economies. Hedge funds and investment trusts have been selling their investments. Since most of these hedge funds and investment trusts are based in dollars, there has been a rise in demand for dollars. This explains some of the recent strength in the dollar compared to Pound Sterling.
Current account deficit
In 2007, UK was running a current account deficit of up to 3% of GDP, suggesting the Pound was over-valued in run up to financial crisis.

Video on Pound Sterling


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