Pound still fragile against the dollar


Pound fragile against the dollar on EU referendum

Image caption
The pound has touched a seven-year low against the dollar

The pound fell against the dollar on Tuesday following a day of steep falls driven by uncertainty over Britain”s membership of the European Union.

Sterling was trading down 0.8% at $1.4034.

London Mayor Boris Johnson”s decision to join the campaign to leave the EU raised expectations that the results of the June referendum would be close run.

The pound was also lower against the euro, down 0.7%, at €1.2740.

The euro was weakened due to a 1.7% fall in fourth quarter German exports.

Tobias Davis, head of corporate treasury sales at Western Union, said: “Where sterling goes from here is the $64,000 question. In the immediate term, I cannot see it retracing back towards the $1.4250-$1.4300 level. But noone wants to have to buy the dollar at these levels.”

Carney comments

Mark Carney, Governor of the Bank of England, noted that there had been movements in sterling since the weekend, when it was announced that the referendum would be held on 23 June.

He told MPs at a Treasury Select Committee hearing: “It does appear that recent moves have been influenced by the upcoming vote.

“What matters for monetary policy is not just a move in the exchange rate but persistence of that move and the reasons behind it. In terms of our forecast…we will take exchange rate as given.”

Gertjan Vlieghe, a member of the Bank”s Monetary Policy Committee, added: “It is possible that at some point that increased uncertainty from foreign exchange investors also ends up manifesting itself in increased uncertainty by households and businesses, which may or may not reduce or delay their spending.”

A continuing decline

The pound has fallen 17% against the dollar over the past 18 months as the outlook for an interest rate has changed.

While the US Federal Reserve increased rates last year, Mr Carney has ruled out a similar move for now.

As a result sterling is seen as less attractive for investors, continuing to fall from the $1.7165 peak reached on 1 July, 2014.

A weak pound helps exporters by making British goods cheaper on international markets.

It also makes the UK a better value destination for tourists.

However, a weaker pound makes imports more expensive, possibly hurting consumers and businesses that rely on foreign goods.