Goodbye to the $2 pound in 2008

The Telegraph ^ | 12/25/07 | Richard Blackden

[bruinbirdman]

Sterling made the headlines earlier this year by breaking though the $2 mark, but the currency is unlikely to reach such heady levels again in 2008 as the UK economy weakens, a clutch of the City's biggest banks now predicts.

The sell-off, which started in foreign-exchange dealing floors last week, saw the pound end at $1.9807 and €1.4411 in a shortened trading day in London on Christmas Eve.

According to HSBC the sell-off is just beginning and will see the pound slump to $1.80 by the end of next year.

In one of the more bearish outlooks circulating around the City, strategists at HSBC argue that a combination of lower interest rates, slowing global growth and falling oil prices will leave the currency in a "perfect storm".

Experts are divided on how rapidly the pound will weaken, with the timing likely to be dependent on when and by how much the Bank of England reduces interest rates.

The currency dropped below the $2 mark last week after minutes from the Bank of England's meeting this month showed all nine members of the Monetary Policy Committee voted to cut rates to 5.5pc. The unanimous decision prompted many economists to predict that rates could now end 2008 at 4pc.

Barclays, which forecasts the pound to fall to $1.93 by the start of the summer, has not ruled out the MPC cutting rates twice more in the first quarter of 2008 - more than traders currently expect.

However, the biggest risk to sterling comes from the City experiencing a severe slowdown next year, according to Barclays' David Woo. "Sentiment towards the UK and the pound can't be more dark and pessimistic than it is now," he said.

[mysterio]

Maybe we can borrow our way to the $3 pound.

[rb22982]

I’d expect the Euro to drop to $1.30-$1.35 in that time frame as well.

[saganite]

Since I spend a lot of time in Europe I would personally welcome that but it will drive US exports back down.