26/08/2011

By Charles Purdy, Director, Smart Currency

The term ‘safe haven currency’ is usually reserved for the US dollar or Swiss franc. Recently the US dollar the ‘go to’ currency when things get tough has experienced significant turbulence. With the US government coming close to defaulting because of disputes over spending cuts as well as being stripped of its AAA credit rating, the USA is not being perceived as safe as it was before.

Bearing in mind the issues the US is facing alongside the widening debt crisis of the Euro- zone, it should not come as a complete surprise that investors have now been turning towards sterling.

Although the UK currently has major growth issues, with spending cuts and deficit reduction being the new global buzzwords, it is only natural that investors have started to look towards the UK where the government has implemented austerity measures which seem to be working.

Moreover, unlike the US, the UK has maintained its AAA credit rating and its bonds have become cheaper, indicating a relative appeal of the UK’s cost cutting measures to the markets. It is also probable that the cheap pound has helped the UK remain relatively solid in this volatile and unpredictable market.

Sterling therefore is showing signs of strength. It has recently jumped to a 3 ½ month high against the US dollar of $1.6550/£1. Most importantly however, sterling has remained relatively strong against the euro as well. This is definitely a first in a long while and a possible sign that a full blown sterling recovery may be on the horizon. In previous months and years, sterling would either be up against the euro or the US dollar, but not both- stuck in the middle between the two at the same time.

For now, sterling is doing better than expected and looks to be regaining ground against the US dollar and euro. Although we should not get our hopes up, we must remember that the UK is in a considerably better position than the US or Euro zone. This within itself is positive. Perhaps the label of ‘safe haven’ for sterling is not as strange as one may have initially thought.

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