Has Quantitative Easing Damaged The British Pound?
Posted by Allison on 15 May 2009, 13:56
It is a question that some people were asking themselves as soon as the announcement came that the Bank of England was going to try this method of helping the economy get back on its feet. And now it seems as if they are asking themselves whether it has done further damage to the British pound.
In truth it is probably far too early to tell what the short or long term effects are likely to be of putting these measures into place. But a recent report available on the Reuters website - does give pause for thought. Sterling has certainly been having an up and down time lately, and when news comes out of the UK that no one was really expecting, it can make things even worse.
The Governor of the Bank of England, Mervyn King, has stated that he believes the measures that they have been implementing so far are starting to have the desired effect. You can read a longer report on this very subject by going to the Telegraph’s website.
So if this is the case, why are other people wondering whether the pound has been damaged by the quantitative easing effect?
The answer seems to stem largely from the fact that the Bank announced just a few days ago that they were going to pump another £50 billion into the programme. No one seemed to be expecting this, and because of the message it sent out the British pound suffered against other currencies as a result. The question is whether that downfall is going to be a small one – or a big one that lasts for a while.
It certainly is fascinating to see the difference that such an announcement – especially when it is unexpected – can have on one or more currencies. You could be looking at the figures on your currency converter one minute, and find they are very different when you decide to look again later on.
The pound was claiming 1.1285 Euros on the 6th May, and on the 7th that was up to 1.1303. So far, so good you may think – and you would be right up to that point. But on Friday the 8th the exchange rate dropped back to 1.1227 – and the following Monday didn’t see things getting any better. By the end of trading on that day, we were down to 1.1128, so clearly the Euro had jumped on the news and made the most of it.
The pattern was slightly different against the US dollar though. The 6th saw a figure of 1.5034 at closing time, and as with the Euro we improved the next day. The final figure then was an impressive 1.5104. Once again there was a slight drop on the 8th – to 1.5072 – and then the weekend got underway.
Monday was where the difference came here, as the dollar clearly didn’t have what it took to take advantage of the pound’s woes. The day ended with the pound claiming 1.5105 US dollars, so here at least the mixed news didn’t make a difference.
So let’s see how this quantitative easing pans out over the longer term. It could be what it takes to bring the recession to an end – or it could still backfire.