Is this the end of sterling?

With sterling hitting 23-year lows against the dollar and moving towards parity once again with the euro, it has not been a good week for the Great British pound.

Rumours of high street banks being nationalised and UK government debt being downgraded from its AAA rating, suggest that further sterling weakness could be seen. American investment guru, Jim Rogers’ urge to investors to sell any sterling they have, has also potentially condemned the UK’s legal tender to a slow and painful decline.

So where does the British public, who need something with which to purchase the weekly Tesco shop, go from here?

Joining the euro has once again been pushed up the agenda but the fact of the matter is that the UK economy is just nowhere near where it needs to be to meet the necessary criteria. Jonathan Quin, director of foreign exchange broker World First says, “A few people I have spoken to recently seem to be under the misguided impression that if the sterling - euro exchange rate reaches parity then that is how we would enter the euro. However, none of the existing countries in the euro had an exchange rate of 1:1 when they joined and this has nothing to do with entry requirements to the euro.

“It would take years to prepare the country for euro entry and the rate would inevitably not be 1:1 then. Even if it was, this would be a disastrous rate for the UK as imports would be far too high. The population would be virtually excluded from holidaying in the Eurozone or importing goods from Europe which we urgently need, the most important example of which is food.”

Jonathan continues, “The pound needs to be weaker at the moment because the current and forecast state of our economy is worse than the Eurozone as a whole. It also should be weaker because the chancellor’s borrowings will increase the money supply. When you increase the supply of almost any good, the price/value usually falls.

“There are lots of instances in the past where a devaluation of a country’s economy has helped it out of difficulties and there are benefits not only to the flexibility that a floating exchange rate gives, but also a weakening of one’s currency. People are frightened of a recession but this is a necessary fact of modern life. We just have to get through this period and not make any rash decisions in the interim.”

So it seems that sterling is safe for now although there remains the problem for businesses and individuals of dealing with the current weakness. Jonathan concludes, “On a positive note, foreign currency options exist for those people needing to change funds in and out of sterling at the moment. An option allows you to fix a worse case rate but still benefit if the rate improves. Like an insurance policy.”