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LONDON: The pound’s tumble this year has taken another leg down, with the currency marking the 30th anniversary of “Black Wednesday” with a drop through US$1.14 (RM5.17) for the first time since 1985.
It takes sterling’s decline against the dollar to 16% as Federal Reserve (Fed) interest-rate hikes keep the US currency on a huge bull run.
Black Wednesday, on Sept 16, 1992, was the day the UK crashed out of the Exchange Rate Mechanism (ERM), a system linking a number of European currencies.
The Bank of England (BoE) had intervened at the time, raising interest rates and spending billions trying to prop up the pound and keep it within a set range, but to no avail.
Doubts about the ability of the authorities to correct the direction had prompted the market to go on the attack.
“There was a tense atmosphere inside the bank,” said Stuart Cole, who joined the BoE just months before Black Wednesday and is now head macro economist at Equiti Capital.
“It was the bank against the markets. There was a sense of apprehension where you knew it was going to end badly.”,
Fast forward 30 years, and much has changed in politics, markets and currency trading, and crucially the pound is no longer pegged. But sterling finds itself once again under pressure thanks to the actions of a central bank. This time, instead of Germany’s Bundesbank and the Deutsche mark, it’s the Fed and the dollar.
As the US central bank jacks up rates to get control of inflation, the greenback looks to be on an unstoppable ascent.
The current weakness has sparked talk – far-fetched, some say – that sterling looks like an emerging-market asset and a full-blown currency crisis is possible.
The argument there is that investors may take fright at the tax cuts and higher spending pledged by new Prime Minister Liz Truss.
Norman Lamont, UK chancellor of the exchequer at the time of Black Wednesday, says there isn’t much of a link between that event and today, and the negativity is overdone.
“I don’t think the pound can be compared with an emerging-market currency,” he said. “Britain is still an attractive destination for inward investment.”
But Truss has inherited an economic maelstrom. Inflation is near a 40-year high, and consumer confidence has plunged, even if the government’s ambitious plan to cap energy bills eases short-term pressures.
Warnings of recession have weighed heavily on the pound, countering the boost from six back-to-back rate hikes by the BoE and another, potentially the largest yet, expected this week.
The current account deficit, which tallies the gap between money coming into the UK and money leaving, is also causing alarm after widening to a record 8.3% in the first quarter.,