While the US dollar has started to gain value, both the Euro and the British pound have dipped significantly in the last six weeks. Professional investors are concerned that a large dip in the value of the British Pound could be significantly destabilizing to world trade, stocks and commodities. See the following article from Money Morning for more on this.
Outside of the earthquake rescue efforts in Chile and the Greek-rescue efforts in Brussels, the big news in the world economy last week occurred in currencies.
As you can see in the chart below, the plummeting British pound sterling has dropped even more than the beleaguered euro in the past month and a half, while the good old U.S. dollar has been as good as gold. (That last bit was a bit of currency irony; the dollar has actually been much better than gold, which has flat-lined in the past six weeks.)
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This rapid deterioration in the pound is very important: It demonstrates investors’ lack of confidence in the economy of the British Isles, as well as an expectation that Britain’s interest rates will remain lower than in any market anywhere else in the world for an extended stretch.
Famed currency speculator and investing icon Jim Rogers said just a few weeks ago that he thought the pound was ripe for a big dive. It’s a forecast worth taking seriously. Don’t forget: It was Rogers who made the fantastic forecasts back in 2007 – when both were riding high – that Fannie Mae (NYSE: FNM) and Citigroup Inc. (NYSE: C) faced ruin.
The pound has been the subject of attack before. For instance, in an incident still remembered as “Black Wednesday,” billionaire investor George Soros – Rogers’ former Quantum Fund partner – made a cool billion selling short a massive quantity of sterling in September 1992.
This could happen again. And while it might be welcomed by exporters and anyone traveling to the United Kingdom on spring break – how about a quick 20% discount on rooms and food? – it would be disastrous in other ways.
Watch this, as it is inherently destabilizing for world trade, commodities and stocks. The Bank of England (BOE) and its allies would have to step in at some point to prop up the pound. And if that currency coalition proved unable to stem the tide against speculators, the loss of credibility would be devastating.
This article has been republished from Money Morning. You can also view this article at Money Morning, an investment news and analysis site.