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Exchange rate


ColinE

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Yes, it's truly horrifying!  As has been discussed at length on another thread recently.  Think of us poor people living on UK pensions at the moment - they aren't going very far.

If you travel abroad a lot, think about opening a Nationwide account and using your cash card.  They at least give you bank rate! I got 1.333 here yesterday.

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There is invariably more than one factor to take into account, but I can't think it has helped the £ that the British govt gives the impression it will write blank cheques to prop up failing banks whilst consumers are heavily in debt. Just as the public have mortgaged their futures, the BoE is mortgaging the future of UK plc - with little to show in return. Gearing is fine when you are in a rising market but disastrous when you are not. Not exactly the scenario that is going to give investors confidence in the pound.

Furthermore, the Bank can't hike up interest rates to bolster the £ due to the effect that would have on business and, in particular, all those people already in debt. Negative equity and all that - again.

So rather than waiting for things to get better in the UK, it seems more likely to me to require greater pessimism concerning the outlook on the continent before the £ will strengthen against the euro.

But it's not my subject and no doubt the clever people on the forum will correct me.

 

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[quote user="Alan Zoff"]

So rather than waiting for things to get better in the UK, it seems more likely to me to require greater pessimism concerning the outlook on the continent before the £ will strengthen against the euro.

[/quote]

I was reading recently (please don't make me go and find the article [:)] ) but the gyst of it was that there is now a much higher percentage of export trade between the €urozone countries taking place within the zone and as a consequence they are less affected by other currencies, most notably the US$.

This probably doesn't explain fully the fall in Sterling but as Alan points out there are other political factors within the UK which is causing it's demise. The market is far from believing that the deal to rescue Northern Rock will not result in a large bill for the UK tax payer no matter how it might be disguised when it happens.

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The main reason is the escalating UK trade deficit due a high level of imported goods.

Devaluing your currency is a convenient way governments can reduce this, by making imports more expensive and exports more competetive. Therefore, the UK and US governments are quite happy to see the £ and US$ go southywards, unless it gets out of control.

Institutional currency speculators don't help either, as once it becomes clear a currency is headed in one direction it becomes a one way bet to make money and therefore currency swings usually overcompsensate.

 

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IF the pound and the dollar devalues then will the euro devalue to keep things in balance, the goverment rescued n rock because they invested in sub prime but were they the only uk bank to write off lots of money, theres lots of storys about international banks write offs for millions but they still made a profit  so did northern rock buy all the bad debt on the planet, i dont think so and also they get money from people in the uk paying there mortgages into the bank, what would of happened if the goverment said to nrock your on your own
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I understood Northern Rock's problems were not as a result of investing in sub prime but because they were too dependent on raising funds in capital markets to fund their lending, as opposed to relying on deposits from traditional investors. The markets had dried up because of sub prime failures elsewhere and a general lack of confidence in the US housing market.

That's an interesting question, i.e. what would have happened if the BoE had not provided the guarantee? Why was it not simply a case that NR would have had to cut back on new lending until conditions had improved or until they had attracted more investors (traditional bank/building society business)? OK, it would have hit their profits but that's the result of bad decisions or bad luck in business. NR and the government both said that NR was solvent - had more assets than debt. It was only the panic caused by the news announcements, weak government statements and politicians jumping on the bandwagon that caused investors to withdraw funds. No bank has enough liquidity to pay out all its investors. That's the nature of commercial banking - which relies completely on public confidence. In much the same way a shopkeeper will let you take away a useful item in exchange for a useless piece of paper (a bank note). 

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[quote user="Sprogster"]

The main reason is the escalating UK trade deficit due a high level of imported goods.

Devaluing your currency is a convenient way governments can reduce this, by making imports more expensive and exports more competetive. Therefore, the UK and US governments are quite happy to see the £ and US$ go southywards, unless it gets out of control.

Institutional currency speculators don't help either, as once it becomes clear a currency is headed in one direction it becomes a one way bet to make money and therefore currency swings usually overcompsensate.

 

[/quote]

Your analysis is correct Sprogster. However governments as such have no direct control over exchange rates or interest rates these days. In my opinion the principal reason for the fall in the value of Sterling is market sentiment. That is expectation that Britain is heading for a major financial slowdown fuelled by a falling property market. In turn caused by the so called credit crunch and sub-prime crisis in the US. These things all have knock on effects in the economy of both countries. The raison d’être of capital markets is speculation. It’s their life blood. Unfortunately we are all at their mercy. Just as we receive the benefits of that speculation in their returns. For example our pension funds.

The UK has just entered a new economic cycle which is likely to last some time. Things will get worse I am afraid before they start to improve eventually. Expect and plan for very difficult times.

Alan Zoff is correct in his description of the origins of the Northern Rock crisis. It was a flawed business model entirely dependant on raising money from capital markets. When that dried up so did their cash flow and the bank technically became insolvent. 

 

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will the pound go up or down against the euro over the next year because I transfer money into my french bank account monthly to pay the french mortgage using currenciesdirect but if the pound is going to go down over the next year im better off  transfering the whole year of money in now so I know where I stand (I would need about 7200 euros)  

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