Tuesday, 11 September 2012

Painful Exchange Rates



Since the start of my semester in London I’ve been experiencing something across the Atlantic that’s been difficult to deal with.  It's something I heard about before traveling to the UK, but something I had never experienced first hand.  No, it's not the adjustment I’ve had to make to the differences in culture, how classes are taught differently, or even how apparent it is, at least to me, how badly the United States & Americans in general are made fun of outside of the States.  Nope, it’s how expensive the UK's sterling pound is compared to its American counterpart, the dollar and subsequently the euro.  

Last week, the sterling pound posted its best numbers against the dollar since June.  This occurred due to a variety of reasons, but simply, the world has pretty much lost faith in the ECB and the Fed.  With respect to the ECB, it has recently revealed a plan to lower borrowing costs to peripheral euro zone countries.  The UK is the Eurozone’s largest trading partner and this easing of the debt crisis is what has been inflating the sterling's value -- especially against the dollar. Also, on Wednesday we will know for sure whether Germany will back the Eurozone’s plan to issue a permanent bailout fund.  There will be skepticism whichever way the decision goes.  What we can see here is that it's not so much how well the sterling is actually doing, but how badly the euro is.  In terms of the Fed, anticipation of QE3 has caused backlash among investors.  Big banks have been issuing warnings suggesting that they are expecting the Fed to embark on its third round of quantitative easing.  Goldman Sachs, Deutsche Bank, Barclays, Morgan Stanley, and JP Morgan all expect over $300 Billion of purchases by the Fed.  Even Barclays’ Olivier Desbarres recently announced that the US dollar would weaken if and when QE3 is announced. All of this anticipation has left a considerable amount of doubt in the minds of investors.  With problems looming with both the euro and the US dollar, investors have limited options to choose from, thus inflating the value of the sterling pound and making my semester abroad in London extremely painful on my wallet.

- Vivek Shah

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