# Factors which are causing Euro to be so strong against Sterling



## Kellypk (21 May 2008)

The Euro is very strong at the moment (against Sterling).
One pound buys about 1.25 Euros

For the past 5 years, the average exchange rate between the currencies has been around 1.45 Euros.

I know there is no point in asking what's going to happen to the exchange rate between the 2 currencies in the short/medium/long term, because nobody knows. Any opinion would be just speculation, and probably as valuable as telling me who is going to win the 3.00pm at the Curragh.

I'm trying to understand what are the factors which have caused sterling to weaken so much against the Euro (13% reduction in a year).

Also what factors would cause it to go back to what it was i.e £1 = €1.45


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## Protocol (22 May 2008)

There are many reasons.

One short term reason is interest rates and the outlook for int rates.

The ECB have held rates at 4%, and it seems they will hold them there for maybe another 6 months to a year.

Whereas the BoE have cut rates from 5.75% to 5%, and may cut further.

So investors sell stg, as the yield from holding stg is falling relative to the euro.


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## Kellypk (22 May 2008)

Protocol said:


> There are many reasons.
> 
> One short term reason is interest rates and the outlook for int rates.
> 
> ...


 
Good answer Protocol, it concurs with what I've read today by Googling the subject.

I was surprised to read that interest rates could effect the exchange rate so much, but then again, I'm not an economist, although I did study economics before.

Obviously UK goods are very cheap now to people in the Eurozone. (13% cheaper than last year).
Surely this will cause inflationary pressure in the UK, as Eurozone buys goods and commodities from the UK, at lower prices than before ?

I await with interest to see what's going to happen to the exchange rate in the medium/long term.

Any views on where the exchange rate will go in the medium/long term ?


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## Duke of Marmalade (23 May 2008)

It all started with the Northern Rock. The strength of a small currency like sterling is heavily dependent on confidence in the integrity of its management. When the BoE is forced to underwrite reckless lending for house purchase, that confidence evaporates. 

I disagree with earlier posts in that sterling should be "naturally" lower still but is being proppoed up by higher interest rates than in any of the major economies. 

All consensus is that it is going to get worse. My prediction is parity within the next few years at which time it might conveniently euthanase and Brits will belatedly join the Euro.


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## Protocol (23 May 2008)

Yes, int rates and changing int rates are a factor that affect FX rates in the short-term.

Yes, with a weaker stg, imports into the UK will be more expensive, so UK may have higher import cost inflation.

We should have lower import cost inflation, due to our stronger currency.

A longer term factor affecting fx rates is the balance of payments situation in each country, whether it is in surplus or deficit. A large and sustained deficit may lead to a generally weaker currency.

The US and UK are both in deficit. So it in the long run, this will not help their currencies.


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## Kellypk (23 May 2008)

Harchibald said:


> It all started with the Northern Rock. The strength of a small currency like sterling is heavily dependent on confidence in the integrity of its management.


Just looking at the historical rates on oanda.com, it's true, the slippery slope began with the Northern Rock crisis on the 12/Sept/2007. Looks like it is levelling of now though (at least in the short term)



Harchibald said:


> All consensus is that it is going to get worse. My prediction is parity within the next few years at which time it might conveniently euthanase and Brits will belatedly join the Euro.


Surely not all Consensus? Any citation on this (I sound like wikipedia !), did any important well respected economist say this ?

Would it be in the UK's interest to join the Euro with a strong Sterling or a weak sterling ?
Obviously a weak sterling is great for UK exports. 
Do the bank of England have any policy about where they would like the exchange rate to be, or are they happy to leave it to the markets ?


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## ccraig (23 May 2008)

Ireland:
Interest rates are deemed unlikely to dip any time soon given inflation concerns and relatively healthy news coming form the likes of Germany etc. 

UK:
Despite inflation concerns, Interest rates are expected to come down more towards the end of the year with relatively  poor figures coming from the UK economy.

Prospects for sterling arent too healthy in the next quarter to end of year


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## joe sod (23 May 2008)

Its got to do with interest rates but also with british economy and its exposure to the credit crunch and the falling housing market there, the international opinion is that britain with its big financial sector is very exposed to the current credit crunch, george soros has said that britain is even more exposed than US, Germany being such a huge economy within the eurozone is masking credit crunch problems in other european countries (notably ireland and spain)


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## Marie (11 Dec 2008)

I've just found this thread which is prescient given events of the past month and the steep fall in the value of Sterling relative to Euro (but not to the Dollar - how does that work?)

On the global level does this mean Irish imports from EU and USA (except UK) cost more?  Does it not also mean that the death-knell of the leisure and tourist industry as Americans and British will be unable to afford Ireland for the next couple of years?  Does it indicate that wealth will flow out as Irish spend in the UK and USA (evidenced by a rash of posts on AAM where posters are taking advantage of the shifting balance and buying cars and major purchases in UK)?  

To Protocol's point about high indebtedness in the UK I seem to remember that Ireland was much higher in the international league of personal debt.  

As far as state expenditure is concerned, from recent investigative journalism there is a distinct impression that the Irish coffers are empty and will not easily be refilled.  The UK national debt is high but its financial sector remains immensely powerful at the moment with even the Chinese economy slowing rapidly, and it continues to have a prime and much-desired export.......expertise and knowledge-systems.  

Last but not least, the 'crunch/crash' began in the UK three years ago and professional financial opinion is that it has or will very shortly 'bottom out'.  When I began to panic recently and think about selling sterling I was advised by canny, wealthy ex-stockbroker friends who continue to be involved with financial products that 'despite appearances' the UK economy would not - ultimately - take the same beating as Euroland which is currently 'held together by sheer German determination'.  

As a lay-woman I don't know what to think.........  However as the weight of woes such as the most recent dioxin scare pile on top of each other perhaps sterling is not so 'doomed' or the Euro so safe?

Any views?


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## z109 (11 Dec 2008)

Marie said:


> I've just found this thread which is prescient given events of the past month and the steep fall in the value of Sterling relative to Euro (but not to the Dollar - how does that work?)


The theory is that loans that were given out in dollars are being repaid as part of the deleveraging that is going on. That means that there is a lot of demand for dollars at the moment, capital is flowing in and this is strengthening the dollar. Sterling has no such advantage, as much of the movement is out of sterling (from London hedge funds and financial companies) into the dollar. So the theory goes, anyway!



> On the global level does this mean Irish imports from EU and USA (except UK) cost more?  Does it not also mean that the death-knell of the leisure and tourist industry as Americans and British will be unable to afford Ireland for the next couple of years?  Does it indicate that wealth will flow out as Irish spend in the UK and USA (evidenced by a rash of posts on AAM where posters are taking advantage of the shifting balance and buying cars and major purchases in UK)?


Yes. Yes (death-knell may be overstating it, but times are going to be very tough). Yes. 



> To Protocol's point about high indebtedness in the UK I seem to remember that Ireland was much higher in the international league of personal debt.


But Ireland is not the eurozone. It's not even very much of the eurozone. Many of our partners are more sensible than us, in particular the Germans.



> As far as state expenditure is concerned, from recent investigative journalism there is a distinct impression that the Irish coffers are empty and will not easily be refilled.  The UK national debt is high but its financial sector remains immensely powerful at the moment with even the Chinese economy slowing rapidly, and it continues to have a prime and much-desired export.......expertise and knowledge-systems.


Financial sectors make lots of money when asset values increase. Asset values are crashing... 



> Last but not least, the 'crunch/crash' began in the UK three years ago and professional financial opinion is that it has or will very shortly 'bottom out'.  When I began to panic recently and think about selling sterling I was advised by canny, wealthy ex-stockbroker friends who continue to be involved with financial products that 'despite appearances' the UK economy would not - ultimately - take the same beating as Euroland which is currently 'held together by sheer German determination'.


Well, about a year and a bit ago in the UK - think Northern Rock. It started earlier in the US with declining house prices, but not that much. The insiders have been convinced about many things, many of them wrong. Maybe they are right, but I don't see how the UK can get out of recession without a significant revaluation of sterling (which is currently taking place). Personally, I think the euro is stronger than just Germany, but they are undoubtedly the strongest bit of it. Which strong bit of Britain is determined to keep sterling together? 



> As a lay-woman I don't know what to think.........  However as the weight of woes such as the most recent dioxin scare pile on top of each other perhaps sterling is not so 'doomed' or the Euro so safe?
> 
> Any views?


The dioxin scare has zero impact on the euro. Absolutely none. It is a problem in part of the agricultural sector in a small economy on the edge of europe.


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## Humdinger (12 Dec 2008)

yoganmahew said:


> But Ireland is not the eurozone. It's not even very much of the eurozone. Many of our partners are more sensible than us, in particular the Germans.


 

The UK is heading into a serious downturn and some would argue that it will be a deeper recession than the Eurozone.
In recent days, the Germans have slapped the wrists of G Brown and A Darling for their blinding belief in a Keynsian response to the issue in the UK. 
I think the UK government have commited to spending $1 trillion thru to 2012 and most of this will be borrowed. The more they borrow, the more sterling will slide. The more sterling slides, the more expensive their interest repayments become. They are saddling their economy and their population with huge debt which will take a long time to repay. Of course, we must realise that we in Ireland are also in the glasshouse and can't throw stones.

Parity may come alot earlier than people are suggesting ... we may even see threads next year of how far past parity the euro will go!! 

None of this is good for our exporters .... while its boom time for Newry.


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## Marie (12 Dec 2008)

That's interesting.  The media are certainly lambasting Gordon Brown and there is criticism of management of the UK economy BUT when you look beyond that every decision Brown has made - from bailing Northern Rock which offended the taxpayer's sensibilities, to the latest commitment to a 'fiscal stimulus' were subsequently emulated by the European and American banks...........unfortunately, a tad too late in the instance of US car manufacturing.  

Do other socio-economic factors - like unemployment levels - figure in how the relative strengths of the major currencies pans out over the next year or so?  One of the current strengths of the UK economy is very low unemployment levels, several major casualties in the past week, including Woolworths, notwithstanding.


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## Joody1 (14 Dec 2008)

Marie said:


> Do other socio-economic factors - like unemployment levels - figure in how the relative strengths of the major currencies pans out over the next year or so?  One of the current strengths of the UK economy is very low unemployment levels, several major casualties in the past week, including Woolworths, notwithstanding.



It is predicted that unemployment in the UK is near to 5 million which includes disability and others on courses, it is also predicted that unemployment will increase a lot in the first 3 months of the new year.

Joody


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## Marie (15 Dec 2008)

But still less than Eurozone.  Can sterling really move out of the major currency league?  Is parity the only necessity for the UK government to switch to Euro?  What happens to the Stock Exchange and could it be privatised?


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## smiley (15 Dec 2008)

You will also find that quite a lot of 'speculators' are shorting sterling, causing its value to dip artificially. Those that short have to buy back that which they have shorted at some point.

The same speculators that drove the oil price up into the heavens are now playing their part shorting anything that can make them a 'quick' buck..sterling included.


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## Afuera (15 Dec 2008)

smiley said:


> You will also find that quite a lot of 'speculators' are shorting sterling, causing its value to dip artificially.


Would you care to explain to the layman how shorting a currency causes it's value to fall?


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## Duke of Marmalade (15 Dec 2008)

Afuera said:


> Would you care to explain to the layman how shorting a currency causes it's value to fall?


Shorting is fancy speak for selling.


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## Afuera (15 Dec 2008)

Duke of Marmalade said:


> Shorting is fancy speak for selling.


So all smiley's comment basically means is that there are traders out there selling Sterling? This sounds more like a symptom of a weak currency than a cause. I doubt they would be selling it if they thought it would be going up.


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## z109 (15 Dec 2008)

Duke of Marmalade said:


> Shorting is fancy speak for selling.


Well, fancy speak for selling something you don't have, at a future point in time, when you hope to be able to buy it for less.

So I sell you an apartment off-plan for 200k (it's current price today) with a delivery date of next June. When the apartment is built, I buy it from the developer for 160k, as negative fundamentals have pushed it's price down, and I've made myself 40k.

Something like that, anyway


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## Afuera (15 Dec 2008)

yoganmahew said:


> Well, fancy speak for selling something you don't have, at a future point in time, when you hope to be able to buy it for less.
> 
> So I sell you an apartment off-plan for 200k (it's current price today) with a delivery date of next June. When the apartment is built, I buy it from the developer for 160k, as negative fundamentals have pushed it's price down, and I've made myself 40k.
> 
> Something like that, anyway


Cheers yoganmahew, that's a nice easy to understand explanation of shortselling.

Taking the same analogy though, I'm still not sure why selling the apartment for 200k would cause it to drop in value. I'm sure smiley probably has the answer to that one.


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## z109 (15 Dec 2008)

Afuera said:


> Cheers yoganmahew, that's a nice easy to understand explanation of shortselling.
> 
> Taking the same analogy though, I'm still not sure why selling the apartment for 200k would cause it to drop in value. I'm sure smiley probably has the answer to that one.


It doesn't - you take a bet that 'fundamental' factors will cause it to drop in price. The idea that short-sellers can affect the price of an asset simply by taking a bet is a myth. If that was the case, the favourite would always win.

Oh, and we're talking about price here, not value.


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## Afuera (15 Dec 2008)

yoganmahew said:


> It doesn't - you take a bet that 'fundamental' factors will cause it to drop in price. The idea that short-sellers can affect the price of an asset simply by taking a bet is a myth. If that was the case, the favourite would always win.


So my understanding wasn't wrong after all then!!! I thought there might be some hidden feature of shortselling that could bring markets down. It's been blamed for so much lately.


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## z109 (16 Dec 2008)

Afuera said:


> So my understanding wasn't wrong after all then!!! I thought there might be some hidden feature of shortselling that could bring markets down. It's been blamed for so much lately.


I was thinking about this last night in bed (yes, sad, isn't it) and the only way I could think of that short-sellers could influence the price of shares is that if enough people short a particular share, it might cause some of the people who hold the share to look again at the 'fundamentals' and make sure that they are still happy with their growth/dividend assumptions. But really, they should be doing this on a continual basis.


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## demoivre (16 Dec 2008)

yoganmahew said:


> It doesn't - you take a bet that 'fundamental' factors will cause it to drop in price. The idea that short-sellers can affect the price of an asset simply by taking a bet is a myth. If that was the case, the favourite would always win.



Don't think George Soros would agree with you and neither would I. It was the short selling of sterling in 1992 that ultimately forced the Bank of England to withdraw the currency from the ERM and devalue it.


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## Duke of Marmalade (16 Dec 2008)

demoivre said:


> It was the short selling of sterling in 1992 that ultimately forced the Bank of England to withdraw the currency from the ERM and devalue it.


A good example of how short selling is not a cause but an effect (of a currency being overvalued). If the devaluation was an unjustified capitulation to short specs the specs would simply have changed tack and gone long forcing a revaluation etc. etc. No more were short sellers the reason for sterling's woe then than they are now.

Remember when the shorties were given the red card for playing with the banks. Hey, the banks have fallen to about a third their value since the shorties were sent off.


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## demoivre (16 Dec 2008)

Duke of Marmalade said:


> No more were short sellers the reason for sterling's woe then than they are now.



Totally disagree with this. The price of a currency ie the exchange rate, is ultimately determined by demand and supply. Selling GBP in 1992 for deutschemarks as Soros ($10 bn worth ) and other speculators did pushed it's price down towards it's permissible limit in the ERM. Because there was so much selling pressure on GBP attempts by the UK authorities to raise the value of GBP through higher interest rates and buying GBP using reserves wasn't going to work - hence the decision to leave the ERM and devalue the GBP.


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## Afuera (16 Dec 2008)

demoivre said:


> Totally disagree with this. The price of a currency ie the exchange rate, is ultimately determined by demand and supply. Selling GBP in 1992 for deutschemarks as Soros ($10 bn worth ) and other speculators did pushed it's price down towards it's permissible limit in the ERM. Because there was so much selling pressure on GBP attempts by the UK authorities to raise the value of GBP through higher interest rates and buying GBP using reserves wasn't going to work - hence the decision to leave the ERM and devalue the GBP.


Wasn't the fact that the British were trying to maintain an overvalued pound sterling in 1992 the real problem though? Soros was able to sell so much sterling at such a good price because the Bank of England was buying it off him. If the BoE hadn't tried to prop the price up the real exchange rate for sterling would have been found a lot quicker and shorting would no longer have been an option for Soros et al.

Either way you look at it I think shorters are only able to win if there is an overvaluation in the first place. Do you disagree? Do you think there are shorters selling sterling, even though they think it is currently fairly priced, simply to try and move the market down? I can't imagine the typical FX trader being happy with such risk to be honest. The only reason I could think of a possible play like that being considered was if volume was low enough to limit the amount they would need to pony up. When you talk about volume at a currency desk though, you're talking serious dosh.


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## Afuera (16 Dec 2008)

Duplicate post.


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## Sunny (16 Dec 2008)

Afuera said:


> Wasn't the fact that the British were trying to maintain an overvalued pound sterling in 1992 the real problem though? Soros was able to sell so much sterling at such a good price because the Bank of England was buying it off him. If the BoE hadn't tried to prop the price up the real exchange rate for sterling would have been found a lot quicker and shorting would no longer have been an option for Soros et al.


 
Exactly. Soros said himself and his colleagues started laughing when the British Chancellor came out during the day and said he was going to borrow £15 billion to buy the pound as that was exactly how much Soros was willing to sell! Soros took advantage of the whole ERM situation. He could short all he likes today and he wouldn't manage to bring down the pound so its not fair to say it was short selling that caused it. It was the tool that allowed Soros take advantage of the situation but it wasn't the 'cause' of the Pounds collapse.


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## Duke of Marmalade (16 Dec 2008)

I agree with _Sunny_ and _Afuera_, I think demoivre is confusing cause and effect. The following is the causal flow:

Currency is overvalued (why? trade relationships ultimately)

*causes*

Shorters/sellers to outnumber buyers

*causes*

Currency to fall

Under ERM the King Canutes tried to block the second causal flow by being unreasoned buyers.

We see that the shorters/sellers are merely the transmission mechanism, they are not the primary engine of currency relationships.


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## smiley (16 Dec 2008)

interesting debate this. All that i know is that people are shorting sterling the same way as they short lots of other things....

shorting forces the price of the currency down. Those that borrow the sterling that they sell in the market, must buy it back at some point in the future, therefore casing the price of the sterling to rise again.

Nobody here is blaming shorters for all of sterlings present weakness. Its just another factor.

All that talk by the media of shorters breaking and bringing down companies was the greatest load of rubbish. They effect the share price allright, but have absolutely NO effect on the share capital of a company.


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## demoivre (17 Dec 2008)

Afuera said:


> Either way you look at it I think shorters are only able to win if there is an overvaluation in the first place. Do you disagree? .



Yes. Valuation is subjective. An overvalued asset can still continue to rise if there is enough buying pressure just as an undervalued asset can still continue to fall if there is enough selling pressure.


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## demoivre (17 Dec 2008)

Sunny said:


> Exactly. Soros said himself and his colleagues started laughing when the British Chancellor came out during the day and said he was going to borrow £15 billion to buy the pound as that was exactly how much Soros was willing to sell! Soros took advantage of the whole ERM situation. He could short all he likes today and he wouldn't manage to bring down the pound so its not fair to say it was short selling that caused it.



He wouldn't bring the pound down now because it freely floats against the euro ie there are no set limits within which the GBP must trade. The ERM was a semi pegged system so  you're comparing apples with oranges. More selling pressure than buying pressure brings price down - that's the only point I have made in this discussion.


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## demoivre (17 Dec 2008)

Duke of Marmalade said:


> I agree with _Sunny_ and _Afuera_, I think demoivre is confusing cause and effect. The following is the causal flow:
> 
> Currency is overvalued (why? trade relationships ultimately)
> 
> ...



I'm not confused about this at all - all I have said is that selling causes price declines ( obviously more selling pressure than buying pressure ). An asset being overvalued doesn't , de facto , mean that it will be sold off  and price will fall. Selling has to take place to bring the price down - it's economics 101.


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## z109 (17 Dec 2008)

demoivre said:


> I'm not confused about this at all - all I have said is that selling causes price declines ( obviously more selling pressure than buying pressure ). An asset being overvalued doesn't , de facto , mean that it will be sold off  and price will fall. Selling has to take place to bring the price down - it's economics 101.


Fair enough, but if short-sellers temporarily depress the value of an asset below it's 'fair' value then they will get burned when it is bought up on the other side of the dip. If you believe in efficient market theory, then an undervalued asset will always find a buyer and the price will return to value. So short-sellers would be toasted if they tried to depress the price of an asset that wasn't fundamentally over-valued.


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## Duke of Marmalade (17 Dec 2008)

demoivre said:


> Selling has to take place to bring the price down - it's economics 101.


As I say, it's what comes first? _Yog_ has explained Economics 100 which reads as follows _"if an asset is over-valued in a free and knowledgable market, sellers will outnumber buyers and vice versa."_The currency markets are incredibly deep and I suggest knowledgable. Can you cite any situation where shorters, acting in consort, have forced a devaluation which was not warranted by the fundamentals?


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## demoivre (17 Dec 2008)

Duke of Marmalade said:


> As I say, it's what comes first? _Yog_ has explained Economics 100 which reads as follows _"if an asset is over-valued in a free and knowledgable market, sellers will outnumber buyers and vice versa."_



That is not necessarily true in the short term - sentiment drives the market. By any reasonable valuation criteria Baltimore Technology in the late nineties was overvalued at £10, more so at £20, and even more so at £30 - it still went to £135 !



> The currency markets are incredibly deep and I suggest knowledgable. Can you cite any situation where shorters, acting in consort, have forced a devaluation which was not warranted by the fundamentals?



Nope but for the umpteenth time the value of any traded asset won't decline unless it is sold off. An asset being overvalued in itself doesn't cause a price fall - the selling has to take place for the price to fall .


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## Duke of Marmalade (17 Dec 2008)

Okay, _demoivre_, I think we all understand the mechanism, and yes the market isn't always right, but it always thinks it is right, it doesn't push prices in a direction which it thinks to be wrong so as to make a killing. 

If we answer the OP with "its the sellers/shorters of sterling, stupid" it doesn't actually throw much light on the situation. The supplementary question is "why are there sellers/shorters of sterling". BTW I note this morning that the Euro has gone above 91p.  The old punt is now trading at £1.16.

As I have said on many occasions since 1999 we are in the wrong currency folks, and it's getting wronger by the day.


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## csirl (17 Dec 2008)

> As I have said on many occasions since 1999 we are in the wrong currency folks, and it's getting wronger by the day.


 
Why? Our currency is bouyant, sterling is sinking. The relative weakness of sterling is a reflection on the state of their economy and their poor decision to stay outside the eurozone. Weak currencies do you no favours - the people of Zimbabwe will confirm. All they do is drive up inflation (imported goods), drive up manufacturing costs (imported raw materials) and depress the value of companies - multinational shareholders get lower profits due to the worse exchange rate.


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## Duke of Marmalade (17 Dec 2008)

csirl said:


> Why? Our currency is bouyant, sterling is sinking.


This is the problem, it is not *our* currency, its value vis a vis other currencies has negligible regard to our economy. As Davy stockbrokers say on their website - "the Central Bank would love to slash interest rates, print money and devalue the currency, but they can't". 

Of course it is a wonderful thing to have a strong currency, as you describe, but only if it is warranted. But if it is not warranted something will have to give, and I am afraid that is going to be mass unemployment as the reality that we are not actually earning a 40% rise in incomes versus our nearest neighbour and largest economic partner takes its toll. Yes that is what has happened - the euro has given us a 40% rise in little over a year without any increase in productivity - on the contrary, we probably should actually have depreciated against sterling.

Latest - euro greater than 93p.


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## Marie (17 Dec 2008)

It isn't quite so simple; British manufacturing (OK don't laugh.........there is a shard left!) benefits; the retail sector benefits (London is currently choka with Americans, Europeans and Russians getting more bangs for sterling bought with their dollars/euros/roubles.

There are still the questions - is it a feasible idea that sterling, as a major world currency, could simply disappear, and if so what happens to the 70+ million UK citizens who get paid/pay bills in sterling?    Could the Zimbabwean situation occur in the UK or Europe?   

The other conundrum is the myth that Brown's alleged 'mismanagement' of the UK economy is causing sterling to go down down but that throws no light on why - specifically - euro is rising (given recession and unemployment conditions in Euroland), and the dollar skew-ways relative to sterling.  Other political leaders appear to be closely imitating UK strategies to shore up individual institutions and weather this unprecedented storm which an economist friend tells me  'has changed everything'.

As Demoivre has commented, sterling is not now pegged, as formerly, and is free to float and adjust against other currencies.  What I still don't understand is why/how - since the same pressures are bearing on the Euro - it is strengthening.  Also - as has been commented - since sterling is now 'cheap' isn't the next phase new purchasers who will drive the price up again?


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## Shawady (18 Dec 2008)

It was mentioned on the news last night that this a deliberate policy to make sterling weak. The euro rate is at 2.5% and therefore strong and much more attractive to invest in.
Will the ECB had to reduce rates close to what the UK and USA have done to counteract this?
Just wondering if we could be in for a period where the main central banks are forced to compete with each other to keep their rates as low as possible.


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## ubiquitous (18 Dec 2008)

Shawady said:


> Just wondering if we could be in for a period where the main central banks are forced to compete with each other to keep their rates as low as possible.



Are we not already there?


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## jhegarty (18 Dec 2008)

ubiquitous said:


> Are we not already there?




no , I don't think the ECB have join the party yet.


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## Shawady (18 Dec 2008)

ubiquitous said:


> Are we not already there?


 
The ECB seem more relucant to drop them any further. The Uk and Fed have been more aggresive, which may force the ECB's hand.
I was thining of an ECB rate of lower than 1%.


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## MOB (22 Dec 2008)

"Fair enough, but if short-sellers temporarily depress the value of an asset below it's 'fair' value then they will get burned when it is bought up on the other side of the dip. If you believe in efficient market theory, then an undervalued asset will always find a buyer and the price will return to value. So short-sellers would be toasted if they tried to depress the price of an asset that wasn't fundamentally over-valued."

I have a soft spot for George Soros, for no reason other than that I once had to make a delivery of papers to his apartment (I once worked in a very swanky 5th Avenue law  firm in NY, as the office runner and general dogsbody - my life has been at times a bit like Zelig, except without actually influencing anything).

Anyway, I tend to side with Demoivre on this argument.  Interestingly, so does George Soros, from whom I quote below:

"I must state at the outset that I am in fundamental disagreement with the prevailing wisdom. The generally accepted theory is that financial markets tend towards equilibrium, and on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future; they help to shape it. In certain circumstances, financial markets can affect the so-called fundamentals which they are supposed to reflect. When that happens, markets enter into a state of dynamic disequilibrium and behave quite differently from what would be considered normal by the theory of efficient markets. Such boom/bust sequences do not arise very often, but when they do, they can be very disruptive, exactly because they affect the fundamentals of the economy.” 

"What I need to do is to demonstrate that there are instances where the participants’ bias is capable of affecting not only market prices but also the so-called fundamentals that market prices are supposed to reflect."


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## z109 (22 Dec 2008)

MOB, I've been reading up on my Soros too and this relates to his view of reflexivity (the two way process between market beliefs and market expectations being one example of this). In my view, what he is saying is that short money can cause a re-evaluation of the fundamentals, which thus makes the fundamentals rather less than, er, fundamental. In essence, they are opinions and as such subject to pressures. But if it was simply weight of short money, the oil price would have collapsed long before it did, whereas, with hindsight, it can be argued that the weight of short money coming in (based on expectations of a global recession and consequent drop in demand for oil) prompted a re-evaluation of the fundamental case for oil as a finite commodity.


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## MOB (22 Dec 2008)

I am not sure I understand the point you are making.  I don't think there is any prevailing consensus that the price of oil has collapsed due to oil being extensively shorted - so I don't think you need to absolve the short sellers from liability (and if they had caused it, I would have to acknowledge the world's debt of gratitude). 

It is, however, commonly held ( perhaps not a prevailing consensus, but certainly commonly held) that the rapid increase in oil prices up to mid 2008 was largely prompted not by 'fundamentals' but by speculation which operated in a self-fulfilling-prophecy kind of way.   This view holds that this price movement was not driven solely by fundamentals but by some very large speculative bets which had both as their object and effect the ramping up of oil prices.

See for example Irish times of 14th July 

[broken link removed]

or New York Times of 21st August

http://dealbook.blogs.nytimes.com/2008/08/21/meet-the-mystery-oil-speculator/


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## z109 (22 Dec 2008)

Ah, I believe, on rereading your original post, that we are agreeing - the 'fundamentals' are subject to bias. That bias can push the price in a direction with the fundamentals being re-invented by the bias until a point comes where the price is ludicrous, there is an obvious shorting opportunity and the fundamentals are reassessed, or, perhaps, not so fundamental after all.

Sorry, I didn't read you quote of demoivre correctly initially and thought it was saying the opposite of what it was actually saying.


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## csirl (23 Dec 2008)

I posted this post below several months ago and I still think it is valid. The short selling excuse is just a red herring. I orignally said sterling and euro would reach parity by the end of 2010 (and was laughed at by some posters)...I have to admit I was wrong, should have said end of 2009!!!



> A number of reasons - *sterling* has been losing steadily against the Euro ever since the Euro got bedded in. Dont see any reason why this trend will not continue.
> 
> A lot of developing countries who keep foreign currency reserves traditionally used a mixture of dollars and *sterling* as these are perceived to be safe currencies. The Euro has now joined this group and so instead of keeping e.g. 50:50 dollar/sterling reserves, many are in the process of switching to e.g. 1/3 each of dollar/sterling/euro. Some are even dumped *sterling* totally and going to 50:50 dollar/euro. Money, like everything else, is subject to supply/demand economics. Price follows demand. There is more demand for Euro and less for dollar and *sterling* hence Euro rises, and dollar and *sterling* fall due to a glut of these currencies on the market.
> 
> ...


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## Oyster (4 Jan 2009)

Csirl, would you predict any sort of turnaround during 2009 or do you think things will just go from bad to worse?  Unfortunately I have to pay the majority of my suppliers in euros and it is crippling my business!  Any advice?  (apart from changing suppliers, which I can't do!)  Would I be better off buying a lot of euros now?


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## The Pool Boy (6 Jan 2009)

Oyster said:


> Csirl, would you predict any sort of turnaround during 2009 or do you think things will just go from bad to worse?  Unfortunately I have to pay the majority of my suppliers in euros and it is crippling my business!  Any advice?  (apart from changing suppliers, which I can't do!)  Would I be better off buying a lot of euros now?



This interests me also but from the reverse perspective - I have the option of paying now or within the next 2 weeks.

With interest rate decisions due this week, what is the likely movement of sterling v euro over that time frame. Sterling has strengthened in the past few days...is this likely to continue or reverse...?


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## Marie (6 Jan 2009)

Sterling's strengthening appears to be linked to the anticipation of an imminent fall in EU interest-rates so the overselling of sterling witnessed in the past few weeks will halt..........possibly reverse.


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## Mayo Money (6 Jan 2009)

I am a new entrant to this website and I have gone through a lot of the sterling v euro posts.  I have to send £4,000 to the uk.  Should have bought it last Friday - should I leave it for a while to see if stg slips again?  Would appreciate an opinion.
thanks


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