Tuesday, August 29, 2017

Are we heading for parity with the Euro?

When I last looked at the exchange rate at around 10am today, the pound was worth 1.07 euros. It's the worst exchange rate for a year. The pound's value collapsed after the Brexit referendum and only ever made a partial recovery against the euro. That recovery has now been lost.

There are both benefits and drawbacks from a weak pound. Our exports are cheaper and we are a more attractive place for foreign tourists to visit. However, our imports are more expensive and inflation is now reducing real incomes, making the UK worse off.

As the UK imports far more that is exported, foreign nations have built up a vast reserve of sterling. If the value of this is deteriorating, foreign banks will not want to hold onto such vast reserves for too long. If bankers feel the pound will continue to slide, the process could be accelerated if sterling is dumped. And there could be another effect. The drop in the pound's value makes takeovers of UK firms cheaper. We could end up with more foreign control and ownership of British companies. Perhaps the Brexit fanatics who have demanded that Britain needs to "take back control" should ponder that one.

Meanwhile, we are heading towards parity with the Euro, the very currency so many anti-Europeans dismissed in recent years as heading for an early grave.

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