Friday, February 26, 2010

Don't buy dollars!

At least, not right now - overnight the pound dropped to its lowest level in nine months against the US dollar, as reported by the BBC.  From the article, much of what was covered in this week's lectures is referred to, notably economic factors affecting the way the UK economy is viewed by speculators.

For example, some analysts suggest that the possible revision downward of 2009Q4 economic growth from 0.1% to zero or even negative has meant that investors have decided to hold the wealth in other forms, speculating on the possibility the pound will fall if that happens.  The Office for National Statistics is due to announce today (Friday) the revisions to its earlier 0.1% figure.  That 0.1% number was found looking at only 40% of the economy, and so may not be exactly right - we'll see!

Another interesting point made in the article is that political uncertainty is affecting the pound.  As Labour closes the Tories' lead in the polls (or rather, the Tories contribute to losing their lead), the probability of a hung parliament (neither party has a majority) increases, and this is seen as a bad thing when an economy is in recession.  This is because it is harder to get new legislation passed that might help kick start the economy.

So this leaves Labour in a bit of a catch-22 situation - if it closes the gap, which is good for them, then the pound takes a hit - something which usually has negative conurtations, as people associate the strength of an economy with the strength of its currency (erroneously).  On the other hand, it should help British exporters to sell goods abroad, which can't be a bad thing...

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