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British Pound Falls to Lowest Level Since 1985

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03/18/2020 | 12:03pm EDT

By Caitlin Ostroff

The British pound fell to its lowest level against the dollar in 35 years, a reflection of the U.K. economy's unique exposure to the disruptions ripping through the global economy because of the coronavirus pandemic.

Sterling has fallen rapidly in recent days, dropping another 2.5% against the dollar to $1.17 Wednesday. It has lost one-tenth of its value this year, according to FactSet. The move brings sterling to its lowest level since March 1985. Later that year, the world's richest nations signed the Plaza Accord, which weakened the dollar, pushed up other currencies and brought the U.S. economy out of a recession.

The pound is being caught up more generally in a flight to dollars that is affecting all of the globe's major currencies. The dollar has strengthened against the yen, Swiss franc and euro in recent days.

But the rapid slide in what remains one of the world's reserve currencies held by central banks is being hastened by fears that the freezing of the financial system will upend the steady flow of capital from abroad that the U.K. economy relies upon.

The U.K. runs a current-account deficit and needs foreign investment to keep its financial system healthy.

"We're likely to see the current accounts deteriorate," said Jordan Rochester, a currency strategist at Nomura. "Investors who usually plug the gap aren't filling it in now."

Investors have also started to pull back speculative positions they had placed earlier this year betting the pound would rise in value. Coming into 2020, sterling seemed likely to benefit as uncertainties around Britain's withdrawal from the European Union subsided after Prime Minister Boris Johnson won a sweeping majority in Parliament.

Since then, the spread of the coronavirus globally and efforts to contain it have led investors to question the economic growth outlook for the U.K. and other countries, and those who cheered on the pound's appreciation are now pulling back. Mr. Rochester said he expects the market has now moved to bet on a further depreciation in sterling.

The rise of the dollar has been the largest drag on the pound, said Paul Robson, head of G-10 currency strategy at NatWest Markets. The ICE Dollar Index, which measures the greenback against a basket of currencies, climbed 0.5% Wednesday, and was up 3.8% for the year.

"There just seems to be a scramble to buy dollars and that's just making the fall in sterling more than just a sterling story," Mr. Robson said. "It feels like sterling is doing bad against lots of currencies but it's mainly against the safe-haven currencies."

The future of Brexit talks is adding another layer of pressure to the pound, as the EU and U.K. have put off face-to-face negotiations because of coronavirus fears. The U.K. left the EU at the end of January, but the two parties remain in a transition period where relations are maintained until the end of the year while a trade deal is negotiated. Even before the pandemic started, that timetable looked tight given the scale of the trading relationship that needed to be hammered out.

As the death toll from the virus mounts, analysts now think the U.K. government will have no choice but to ask the EU to extend that transition period. "If it is not the central scenario it will be soon," said Mujtaba Rahman, managing director at consulting firm Eurasia Group.

But with the British government reaffirming its commitment to end-of-year deadline Wednesday, it is a risk investors still see down the line.

"It seems like the position from the British government has not changed at all on the importance of this date," said Richard Falkenhäll, senior foreign-exchange strategist at Swedish bank SEB.

The pound could reach parity with the dollar if efforts to contain the coronavirus cause the economy to deteriorate further, he added.

--Max Colchester contributed to this article.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com

 

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