Business | Economy

History repeats itself as pound tumbles

The pound tumbled last week to a record low against the euro and dropped below $1.50 (Dh5.51) against the dollar for the first time in six years as traders abandoned the currency.

  • By Peter Garnham, Financial Times
  • Published: 23:41 November 15, 2008
  • Gulf News

The pound tumbled last week to a record low against the euro and dropped below $1.50 (Dh5.51) against the dollar for the first time in six years as traders abandoned the currency.

The pound also plummeted to its lowest level for 13 years on a trade-weighted basis after the Bank of England - which last week delivered a shock 150 basis point cut in interest rates - said the UK economy had fallen into recession and signalled more sharp rate cuts.

Adding to the pressure increasing signs that international investors were abandoning UK assets after aggressive selling of gilts since mid-September. The pound fell last week to its weakest level in six and a half years, dropping 5.6 per cent to £0.86 (Dh4.69) versus the euro.

Simon Derrick at Bank of New York Mellon said the pound's fall was starting to overshadow the events of September 1992, when sterling was rejected from the European Exchange Rate Mechanism.

He said then, as now, the pound was hit because investors believed the UK authorities would take drastic action to ease monetary policy in the face of a steepening recession.

Following the Bank of England's aggressive interest rate cut and subsequent comments, UK interest rates are now below euro zone rates for the first time since the creation of the euro in 1999.

Meanwhile, the yield spread between German and UK government bonds stands at its highest level in more than a decade.

Derrick said the only question that needed to be asked was whether speculation over the future path of interest rates in the UK had run its course.

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