Sterling slither

The pound has taken a beating since the start of the year.

The graph says it all: the pound has had a grim two months against most major currencies. It has risen against the Japanese Yen only because the new Japanese prime minister has imposed a 2% target rate of inflation on the Bank of Japan. There are several possible reasons for the drop in the value of sterling:

  • The immediate concerns about a US fiscal cliff and a Eurozone collapse have receded, at least for the time being.
  • The disappearance of the UK’s triple-A rating. This had been expected for some time, although most experts thought the ratings agencies would wait for the Budget on 20 March before acting.
  • The UK’s austerity programme is viewed by some as failing to deliver on either deficit reduction or economic growth.
  • An expectation that the new governor of the Bank of England, who is due to arrive in July, will be more willing to see sterling weaken.
  • The new uncertainty about the UK’s continued membership of the EU.

The flipside of sterling’s demise is that the good performance most global stock markets have put in since the turn of the year has been magnified by the pound’s depreciation – with the exception of Japan. It is a useful reminder of the benefits of making sure your investments are internationally diversified.

Past performance is not a reliable indicator of future performance. The value of investments and income from them can go down as well as up and you may not get back the original amount invested. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

 

28th March 2013

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