UK Pound Predicted to Weaken on Slow Economic Recovery

Posted October 12, 2009

The UK pound may weaken as the national debt rises and inflation heats up. A new Gulf nations monetary policy independent of the US monetary policy is being developed. The US, Brazil and Argentina are on holiday today. The US markets are open but some, like the bond markets, will be closing early.

 

The weekend was fairly quiet in the currency market.  Monday is a holiday for the US, and though the markets are not closed, so there might be some variability added to the currency and equity markets anyway.  There are a number of US earnings and government reports to be issued later in the week.  Investors are anticipating these reports will serve as indicators of the status of the US economy and its progress towards recovery.

One thing seems to be generally agreed – the US economy will not recover quickly. In fact, there is increasing concern this will be a jobless recovery meaning unemployment will stay high for another year to two years. There are over 6 million unemployed in the US.

The biggest news early Monday morning in the UK was a report by the Centre for Economics and Business Research that said the benchmark interest rates will be kept at its historic low of .5 percent for at least another year. The report also states the UK pound could fall to a rate below parity with the euro.

The report addressed the eventual need of the UK government to reduce the budget deficit.  If spending is not cut the deficit will continue to grow and stymie recovery.

It’s almost possible to replace “UK” with “USA” and the report would still be accurate. The response to the financial crisis in the two countries has been quite similar and thus the same conditions exist in the financial markets and at the budgetary level.

The report does come right out and say the pound could fall to $1.40 or lower against the US dollar. The UK pound is currently at $1.5915. The pound is at 92.68 pence per euro.

Inflation in the UK is beginning to accelerate and this is creating the problem of what to do about interest rates and exiting the quantitative easing policies. Factory goods prices increased .5 percent more in September compared to August.

Since interest rates cannot be increased yet without damaging the progress of economic recovery, it leaves a quandary over what to do about the weakening currency.

In the US, the interest rates are being held at zero to .25 percent.  The Federal Reserve Chairman Ben Bernanke has publicly stated rates will not be increased until economic growth has become sustainable.

Early last week the plans for a Gulf nations shared currency to be used as a replacement for the US dollar in trading is currently still scheduled to begin 1-January-2010. Kuwait has requested the deadline be moved to a later date to give more time to evaluate the consequences of such a move.

If the new Gulf Cooperation Council is successful, a new monetary union composed of 4 Gulf nations will exist that intends on maintaining independence from the US monetary policy. 

There is growing concern around the world that the US dollar is in danger of weakening further and that the Federal Reserve is willing to accept the weak dollar despite claims the government is pursuing a strong dollar.

The yen is at 90.040 yen per US dollar.

Brazil and Argentina are on holiday today.

 

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