Wednesday, March 03, 2010

Financial Times Editorial Comment: Sterling’s slide is not just about polls

Financial Times Editorial Comment: Sterling’s slide is not just about polls
Copyright The Financial Times Limited 2010
Published: March 2 2010 20:11 | Last updated: March 2 2010 20:11

Britons never miss an opportunity to be gloomy about their country. This week the media have turned their attention to the currency markets. The pound is 1.7 per cent down after a poll released at the weekend suggested that no political party would win a working majority in this year’s general election. Some investors, fearing the UK might be unable to close its yawning fiscal deficit without a strong government, sold sterling.

British commentators have made much of the humiliation of having the Zimbabwean dollar rise against the pound. But sterling’s latest depreciation should not be a trigger for panic about Britain’s fiscal sustainability. Worry about political gridlock was a reason to sell sterling this week, but it was only one of several.

The foreign exchange market movements do not seem to reflect market fundamentals. If there were fresh reasons for concern about fiscal policy, UK bond yields would have risen. But they fell. If there were new causes to fear for the government’s ability to fund itself, market expectations for inflation would have risen substantially. But they have not.

The brotherhood of currency traders may have become materially more nervous about the political risks of a hung parliament, but they are catching up with concerns that investors in other markets had already priced in. This fear may weigh on the pound in the coming months, but it will not break sterling.

Britain’s political problems are simple compared with those of the US, with its structurally hung parliament, or the split decision-making processes of the eurozone. Nick Clegg, leader of the Liberal Democrats, has made clear in Tuesday’s FT that if there is a hung parliament, he is determined to protect the “sustainability of the public finances”.

In truth, a bigger source of uncertainty than the prospect of a hung parliament is the fact that – months before an election is required by law – neither of the main parties has set out a credible deficit reduction plan. Investors do not yet know whether either main party has the political stomach to take the necessary action, and voters do not yet know what their options are.


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