Analysis: In world's currency spat, Britain's pound slides under radar

LONDON Fri Feb 22, 2013 10:46am EST

Some British sterling money in coins and bank notes is seen September 2, 2005. REUTERS/Catherine Benson

Some British sterling money in coins and bank notes is seen September 2, 2005.

Credit: Reuters/Catherine Benson

LONDON (Reuters) - If there really is a global currency war going on, then Britain might appear to be one of its winners.

But unlike Japan, which came in for heavy criticism from other countries for the recent plunge in the yen, the sharp fall in the value of the pound this year has avoided much attention from global policymakers.

So far this year sterling has lost as much as 8 percent against the euro and almost 7 percent against the dollar.

The fall picked up pace after signs this month that the governor of the Bank of England, Mervyn King, and his successor Mark Carney will not be rushing to tackle high inflation.

The latest fall in sterling began more recently than the controversial slide in the yen, which has lost about 16 percent of its value against the dollar since November on signs of a new, more aggressive stimulus approach by the Bank of Japan. But both have performed similarly since the start of 2013.

They are both seen by many economists as candidates to be the weakest currencies among the world's big developed economies as policymakers try to escape a rut of stagnant growth.

"Governor King talked sterling down with perhaps somewhat more deftness than Japanese officials, but talk it down he did," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

As well as brushing aside the impact of a weak pound on inflation, King said last week that countries had the right to pursue stimulus, regardless of the exchange rate consequences.

Unlike Japan, however, which has a history of intervening in foreign exchange markets, Britain's tradition of a more hands-off approach to the pound is probably a reason for the lack of concern so far among other economies, Chandler said.

"There's no doubt King wants the pound to fall but he has stayed on the right side of the line," he said, describing King's approach as a low-level way of influencing markets.

On Wednesday, the pound fell nearly 1 percent against the dollar and the euro in a single day on news that King had pushed fellow policymakers, unsuccessfully so far, to print more money to buy further government debt.

Another top Bank of England policymaker, Martin Weale, added to the selling pressure when he took the unusual step, for a central banker, of saying on February 16 that the pound might need to fall further to rebalance the British economy.

Some analysts think that is likely to happen.

"If the central bank continues in this way you have to think that $1.40/$1.42 could come into play within the next couple of quarters," Hans Redeker, head of Global FX strategy at Morgan Stanley, said earlier this week.

On Friday the pound was trading at around $1.53.

A big fall in the value of the pound would pose risks. British consumers are already struggling to cope with high inflation while their wages grow only slowly. Higher prices for imports, including oil, would add to the pain.

NO MAJOR THREAT

The lack of concern about the pound's fall may possibly also be because the wounded British economy and its feeble export performance pose little threat to other countries, and because the scale of problems elsewhere have been so huge.

"The Brits are doing this quite neatly and have done so for years, by arguing inflation is higher and it's always down to temporary effects," said a euro zone monetary policy official, speaking on condition of anonymity.

"The Europeans were preoccupied with the euro zone, and 'normal things' like this went under the radar screen."

The calming of the euro zone crisis in recent months has caused the pound to lose some of its relative safe-haven appeal.

At the same time, weighing on the currency are signs that the British government will miss its austerity targets, probably triggering a downgrade of the country's AAA credit rating and also failing to generate the confidence needed for growth.

It remains to be seen if the weaker pound will provide any help to the country's attempts to get back to financial health.

British goods exports, as a share of international trade, have done no more than hold their own since 2008 despite a sterling depreciation of around 20 percent since then, the Bank of England's Weale said.

That lackluster performance has frustrated hopes for a manufacturing revival that could help wean Britain off its dependence on a weakened but still huge banking sector.

"The BoE is a bit puzzled, as we are, as to why the depreciation in sterling ... has not lead to particularly strong recovery in UK exports," said Anna Leach, head of economic analysis at British employers group CBI.

She said the models normally used by economists to link export growth to currency depreciation no longer seemed to work.

Britain was probably attracting less attention over the fall in its currency than Japan because of the more pivotal role of the yen in foreign exchange trading. But that could change if Britain's government and central bank are seen to be actively trying to engineer a new, lower level for the pound.

"The UK has always said it doesn't aim for a target level," Leach said. "It's not entirely clear that that position has changed. I don't think that it has. People will be holding fire on the UK until that time."

(Additional reporting by Jessica Mortimer in London and Pedro da Costa in Washington)

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