The collapse of sterling

Peter S Ellis, CEO, Foreign Currency Direct: Markets are created by opposing views of buyers and sellers, now for the first time in a long time they all seem to agree. When that happens you can expect seismic shifts in currency values and fortunes to be made and lost. The one thing everyone is agreeing on is that Sterling is likely to fall fast and far. While this is bad news for most of the UK, those doing business overseas, or people with second homes looking to convert their Euros back to Pounds can get the best rates around.

Why is Sterling falling?

1. Soaring National Debt

Concerns over the sustainability of the level of public debt, which has increased over 20% in a year, and now stands at £804bn, is weighing heavily on sterling value. Servicing the national debt now equates to £1 of every £4 spent by Gordon Brown's government and 57.5% of the country's annual output.

2. Negative Balance of Payments

The view that Sterling will collapse is supported by the Bank of England who state in the current Quarterly Bulletin that the UK has been running in deficit (imports greater than exports) for some time which has only been possible due to foreign investment in the UK. This is now suddenly drying up.

3. Quantitative Easing and Bank Bad Debts

Quantitative Easing only dealt with the effects of the credit crisis, not the cause - which is billions of pounds of bad debts, still sitting on bank balance sheets. In the words of Steve Barrow at Standard Bank, "The market is punishing these two currencies (USD & GBP) for quantitative easing."

4. The Return of Risk

The downward pressure on the pound is compounded by the return of risk. At the beginning of the financial crisis, investors and speculators withdrew money from higher risk exotic currencies and moved to the perceived safer havens of the US Dollar (and partly the Pound). This helped to keep up the value of the US Dollar. However as confidence returns to the rest of the world economy this position is reversing, investors are once again confident enough to move to riskier currencies. This may see the Pound dip against a basket of currencies over coming months.

5. Commodities Rally

This selling off of the US Dollar may lead to a slide in the value of the greenback over the coming months which may make commodities (like oil, coal etc) cheaper, relatively speaking. The falling price will lead to an increase in demand and this in turn will help currencies in mineral rich countries rise. These currencies include the Canadian Dollar, the South Africa Rand, the Australian Dollar and even the Scandinavian currencies like the Norwegian Swedish Krona. The Pound may well further struggle in comparison with these countries.

6. Ageing Population

At a time when Britain should have saved every penny to prepare for meeting it's social obligation to the country's rapidly ageing population, the economic hangover of generational debt repayment from the credit crisis has left the coffers empty. As a result we are seeing record numbers of people looking to sidestep the required crushing tax rise required.

And the good news

People with houses abroad, or money overseas that they want to convert back to Sterling, can get very good rates at present.

Independent research company Get Sound Advice has looked into how much money you could repatriate if you have Euro 250,000 to move. The difference between using a broker and a bank could mean an extra GBP 17,604.36 in your bank account.