STERLING dropped sharply against the dollar and the euro yesterday, leading currency speculators to describe the UK economy as ‘stagnant’ and accuse the Bank of England of ‘cheering the pound down’.
Sterling was down to a seven-month low against the dollar, while against the euro it hit a 15-month low.
The pound fell 0.5% to $1.543, its lowest since 13 July, 2012 and against the euro it fell 0.3%, making a euro worth 86.3 pence.
The falls came after Bank of England policymaker Martin Weale said at the weekend that he wanted sterling to weaken further to bolster the UK economy.
‘It may be that high levels of uncertainty and a reluctance to take on new risks have stood in the way of exporters seeking new markets and domestic producers doing what is needed to displace imports,’ Weale said in a speech at the Warwick Economics Summit in Coventry.
‘Provided the calmer atmosphere we have seen since the summer is sustained, we may see further benefits of the depreciation.’
With that sort of talk from the Bank’s policy guru, currency speculators are now betting on sterling having a lot further to fall.
The pound has already been weakening sharply so far this year, fuelling inflation and the expectation that the UK will lose its triple-A credit rating.
Last week, the pound suffered its biggest weekly loss since early June 2012.
The pound had already been under pressure since the middle of last week when the Bank of England quarterly inflation report forecast higher inflation and weak growth.
Governor Sir Mervyn King said the Bank was ready to tolerate higher inflation to support the economy.
Steve Englander, currency strategist at Citi, wrote in a research note: ‘If you go through recent Bank of England commentary, they are quite openly cheer-leading the pound down as a way of closing the UK’s external imbalance and generating a cyclical recovery.’
Speculators have increased their bets against the pound, with latest data from the Commodity Futures Trading Commission showing they built up their largest ‘short’ sterling bets since last June.
Short sellers make money if a currency or share price goes down.
William Poole of FC Exchange said: ‘By stating that the most natural means of resolving the problem of our stagnant economy is for the nominal exchange rate to fall, Weale has made markets suspicious that the BoE may actively weaken GBP in what is a bit of a breakaway from their usually conservative rhetoric.
‘We don’t see this happening outright, but given how vulnerable the pound is at present, it doesn’t take much to give it an extra nudge downwards.’
l Japanese shares rose yesterday after finance ministers of the G20 group of nations avoided singling out Japan for criticism over the recent yen weakness.
The yen has dipped nearly 15% against the US dollar since November amid Japan’s efforts to stoke inflation.
There were concerns that a criticism from G20 may prompt Japan to alter its aggressive stance. The fears were that it would result in the yen rising again.
Japan’s Nikkei 225 index rose 2%.