Another crash of sorts - that of the British pound against the dollar.
The GBP dropped to about $1.6902 this morning — it’s lowest level against the dollar in almost five years.
This has as much to do with the curious happenings in the USD as it does with the UK’s own financial crisis — the dollar having rallied even as the U.S.’s troubles deepen. That makes the rush to US currency more a flight from risk than a flight to quality, as Bred Setser explains very well in a recent, long-ish USD post. There’s also this, from jck at Alea:
Bank X, a foreign bank takes $ deposits and invests proceeds in $ assets, sadly these turn out to be toxic. Bank X dumps the toxic assets, takes the loss. What do they have to do to make the depositor whole ? BUY $
$ will gain against EUR and GBP, not JPY.
Indeed, BIS data as of March 2008 shows non-US banks with a net dollar liability of almost $450bn, the flipside of those deposits.
While a weakened pound will have negative implications for importers and possibly (a big possibly) boost exports from the UK, there are, apparently, at least a few definite beneficiaries. From Money Money Money:
Many British bloggers earn most of their money in dollars, and the strength of the pound versus the dollar in the last two years has been really painful for us… However, one outcome of the credit crunch is that Americans are repatriating their money en masse, which means that the dollar has been strengthening against sterling. It’s a huge relief to us Brit bloggers. To illustrate, a year ago, $20 converted to £9.51 in Paypal (the effective rate they used was $2.1 to £1). Now $20 buys £10.59 (Paypal use a rate of $1.88 to £1). The true rate in the forex markets is $1.70 to £1. But still, even with Paypal’s forex commission, this is an 11.35% improvement. If you earn a lot of dollars, it really adds up. Long may it last.
FT Alphaville, however, is not pleased, one of us having spent $200 on Ebay last night, only to see it come out to about £120 instead of the usual £100. So much for US bargains. At least shipping costs are coming down though.
Related links
Bonfire of the carry trades - FT Alphaville
