Where there is a (political) will…

By Charles Purdy [email protected]

Charles Purdy is a Director at Smart Currency Exchange Limited – the only international payment specialists in the UK who work specifically to help people save money on regular transactions such as mortgage or pension payments.

Monthly currency note – October 2009

In the last month, we have seen Sterling lose a lot of ground against most currencies. This started with the surprise announcement that the Bank of England was going to increase its programme of quantitative easing to 175 billion pounds sterling.

This money is used to increase liquidity in the UK banking system and help reverse the effects of the recession. The worry for the market was that the UK recession is more deep seated than thought. This was then compounded when the minutes of the Bank of England stated that certain members had wanted to increase it to 200 billion pounds sterling.

Over the coming weeks, economic data was showing that the UK was likely to grow in the third quarter of this year, which is positive. But, at the same time, the Governor of the Bank of England made a number of unhelpful comments.

He supported the view that the current level of Sterling was probably here for the long term and that a weak Sterling boosted exports.

He also stated that the road to recovery was going to be long and hard. But I believe the fundamental problem for Sterling is that until there is a political will and clear plan of action to bring down government debt from the current record levels, then no foreign investor is going to believe in Sterling – and it will continue to weaken.

The Euro has been flavour of the month gaining ground against Sterling and the US Dollar, although there has been a slight pull back in recent days.

A bit like the UK, the third quarter is likely to show growth, which is good news. The European Central Bank has also been very effective and efficient in supplying liquidity to the market with levels of support that dwarf the amount made available by the Bank of England.

However, the strong Euro is hurting exports making them more costly and consumer confidence, although still on the increase, is slowing and is still at much reduced levels when compared to 18 to 24 months ago.

This has led the European Central Bank to increase its rhetoric regarding the need for a strong US Dollar. The major advantages for the Euro are the diversity of the euro zone and the might of the German industrial machine – and its position as the world’s greatest exporter. So, don’t expect any real weakness from the Euro in the short term.

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