Sterling falls victim to market stresses

By Peter Garnham in London
Published: March 18 2008 18:54 Last updated: March 18 2008 18:54
Sterling has joined the dollar as one of the biggest casualties of the credit crisis.
The pound recovered some ground on Tuesday when global equities showed signs of stability, after global equity markets tumbled following the rescue of Bear Stearns, the US investment bank. The came after it on Monday experienced its biggest one-day fall since its ejection from the European exchange rate mechanism in 1992.
The pound dropped to a record low of £0.7912 against the euro and plunged nearly two cents against the dollar. On a trade-weighted basis, the pound fell nearly 2 per cent, taking it to its weakest level since January 1997.
Analysts said worries over the health of the global financial sector and the resulting weakness in UK financial stocks were the catalyst for the move and that the currency was likely to continue to come under pressure.
Hans Redeker at BNP Paribas, said: “Sterling is likely to feel the full force of the stress in financial markets given UK economy’s exposure to the financial sector.”
Concerns over the UK financial sector have been weighing heavily on the pound in recent months. Sterling has fallen more than 4 per cent against the dollar since it hit a 26-year peak above $2.10 last November, lost more than 12 per cent against the euro, and tumbled nearly 18 per cent against the yen.
Markets expect the Bank of England to deliver interest rate cuts of 100 basis points by the end of the year to stave off the effects of the credit crisis.
A close relationship has developed between the outlook for the UK financial sector and the performance of the pound, particularly against the euro.
Simon Derrick at Bank of New York Mellon said it was significant that the start of the pound’s aggressive downward trend against the euro started on September 13, the day it became clear that the Bank of England had been providing emergency funding to Northern Rock, the recently nationalised mortgage lender.
Mr Derrick said there had been a 90 per cent correlation between the performance of the pound against the euro and the persistent outflows of foreign capital from UK equities as monitored by the Bank of New York Mellon.