Why everything is relative when it comes to the rise in Sterling.
At the height of the British Empire, the exchange rate between Sterling and the US Dollar was more than five to one. Then the Americans took over and the mighty greenback became the reserve currency of the world. Since the war, we became accustomed to getting about $2 for every £1, with a bit of volatility. However, the sight of parity is an altogether different discussion. The question is, can this horrible trend go on forever?
Never fear, hindsight is here and the one thing we can say for sure, is that Empires never come back. The Egyptians ruled for more than a thousand years, so did the Italians, but you would struggle to find either among the list of leading economies or political powers today. However, that doesn’t mean the exchange rate needs to continue to decline. Switzerland and Norway seem to be doing just fine against most other big boys in the room.
To put it simply, the fall or rise of any currency is demand from other countries, also called FDI’s (Foreign Direct Investments). Not surprisingly, those that have money to invest are attracted to a stable business environment, economic prowess, and faith in government policy. One can argue one way or another if any of these criteria are currently in place when it comes the UK, but luckily, we don’t have to, and that’s because of the Gilt markets.
They broke the market that started it all in 1694. Someday economic history professors will have to explain to their students how anyone in charge could be that stupid. Fact is, they really did try to push through an unfunded tax cut to the rich, whilst 99.9% of the population is eating leftovers and preparing for the upcoming blackouts in winter, but I digress.
Which brings me to our new prime minister. Suffice to say, nothing should surprise us anymore, but the man did go to Stanford and worked at Goldman. At least he will know how a spreadsheet works, which is more than we can say for his predecessors who seem to have been utterly perplexed by the functions of a calculator. Moreover, I think he will make it easier for investors to see Britain for what it is: a relatively advanced economy sitting perfectly in between the US and the EU. In other words, Sterling will be just fine, as long as we stop shooting ourselves in the foot.