A foreign exchange dealing room in Seoul, South Korea. AP Photo
A foreign exchange dealing room in Seoul, South Korea. AP Photo
A foreign exchange dealing room in Seoul, South Korea. AP Photo
A foreign exchange dealing room in Seoul, South Korea. AP Photo

Sterling’s slide against the dollar sparks fears of economic spiral


Gillian Duncan
  • English
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Sterling’s slide against the dollar to a rate last seen in 1985 has sparked concerns that the plunge could represent the start of a dramatic UK economic downturn.

Some have said it could trigger a collapse in confidence in British assets and a balance of payments crisis.

Fund managers, analysts and former policymakers say such a scenario is unlikely, but they suspect the pound will need to become cheaper before investors buy the currency again.

The currency fell to as low as $1.1407 on Wednesday, as investors took a dim view of the economic outlook under new British Prime Minister Liz Truss.

On Thursday, Ms Truss is due to unveil a £100 billion ($114.8bn) package to cap consumer energy bills for homes and businesses, funded by a massive increase in government borrowing.

In an interview with Sky News, the new levelling-up secretary, Simon Clarke, dismissed the idea that the proposals prompted the plunge in the pound.

“We all obviously would never want to find ourselves in this situation,” he said. “And there is no question that it is the latest in a series of quite extraordinary interventions that the government has had to make to support families, which obviously reflects our determination to do the right thing for the British people.

“But let’s be clear, if we fail to act. If we don’t protect the economy against the shock of the size and scale we are talking about then there is going to be enormous economic damage in any event.”

He said the hardship caused by the proposed rise in the energy price cap in October and beyond would be “enormous”.

The government was already hearing from businesses about their inability to pay.

“And so we could have anticipated I think a huge amount of damage to the economy had this rise gone ahead unchecked,” he said.

“So you are balancing, frankly, two very challenging things. In these circumstances markets will respect that this is the most sensible thing to do.”

Ms Truss is under scrutiny as she gets ready to cut taxes and raise spending in a gamble that loosening the fiscal purse strings — at a time of double-digit inflation — will boost economic growth.

“The market has moved very far and very fast in the last couple of weeks, in the face of what is a relatively bleak economic outlook. That means there will be a recession but it will be deeper in the UK,” said Charles Diebel, head of fixed income strategy at Mediolanum Asset Management, which is betting against the pound.

Britain faces slower economic growth and more persistent inflation than any other major economy next year, the International Monetary Fund forecasts, and Goldman Sachs expects the UK economy to contract by 0.6 per cent in 2023.

“The currency is cheap but probably needs to be cheaper,” Mr Diebel said.

Several economists including top economist Mohamed El-Erian forecast the pound will hit $1.10 soon, implying a further 4 per cent fall from current levels.

Capital Economics believes sterling could test its all-time low of near $1.05, plumbed in March 1985, just before G7 powers acted to rein in the “superdollar” of the Reagan era, in the so-called “Plaza Accord”.

Yet the rush to dump British assets has been driven by international developments too, including soaring gas prices and global growth worries that have driven investors to seek shelter in the dollar. The euro and yen have also hit multi-decade lows.

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Retirement funds heavily invested in equities at a risky time

Pension funds in growing economies in Asia, Latin America and the Middle East have a sharply higher percentage of assets parked in stocks, just at a time when trade tensions threaten to derail markets.

Retirement money managers in 14 geographies now allocate 40 per cent of their assets to equities, an 8 percentage-point climb over the past five years, according to a Mercer survey released last week that canvassed government, corporate and mandatory pension funds with almost $5 trillion in assets under management. That compares with about 25 per cent for pension funds in Europe.

The escalating trade spat between the US and China has heightened fears that stocks are ripe for a downturn. With tensions mounting and outcomes driven more by politics than economics, the S&P 500 Index will be on course for a “full-scale bear market” without Federal Reserve interest-rate cuts, Citigroup’s global macro strategy team said earlier this week.

The increased allocation to equities by growth-market pension funds has come at the expense of fixed-income investments, which declined 11 percentage points over the five years, according to the survey.

Hong Kong funds have the highest exposure to equities at 66 per cent, although that’s been relatively stable over the period. Japan’s equity allocation jumped 13 percentage points while South Korea’s increased 8 percentage points.

The money managers are also directing a higher portion of their funds to assets outside of their home countries. On average, foreign stocks now account for 49 per cent of respondents’ equity investments, 4 percentage points higher than five years ago, while foreign fixed-income exposure climbed 7 percentage points to 23 per cent. Funds in Japan, South Korea, Malaysia and Taiwan are among those seeking greater diversification in stocks and fixed income.

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Day 5, Abu Dhabi Test: At a glance

Moment of the day When Dilruwan Perera dismissed Yasir Shah to end Pakistan’s limp resistance, the Sri Lankans charged around the field with the fevered delirium of a side not used to winning. Trouble was, they had not. The delivery was deemed a no ball. Sri Lanka had a nervy wait, but it was merely a stay of execution for the beleaguered hosts.

Stat of the day – 5 Pakistan have lost all 10 wickets on the fifth day of a Test five times since the start of 2016. It is an alarming departure for a side who had apparently erased regular collapses from their resume. “The only thing I can say, it’s not a mitigating excuse at all, but that’s a young batting line up, obviously trying to find their way,” said Mickey Arthur, Pakistan’s coach.

The verdict Test matches in the UAE are known for speeding up on the last two days, but this was extreme. The first two innings of this Test took 11 sessions to complete. The remaining two were done in less than four. The nature of Pakistan’s capitulation at the end showed just how difficult the transition is going to be in the post Misbah-ul-Haq era.

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Houthis: Iran-backed rebels who occupy Sanaa and run unrecognised government

Yemeni government: Exiled government in Aden led by eight-member Presidential Leadership Council

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Updated: September 08, 2022, 10:38 AM