The pound sterling has dipped to a level not seen since the summer of 1985. Many of us weren’t even born yet back then. Britain’s currency has experienced a downward spiral ever since the UK voted in a referendum earlier this year to leave the European Union, leading many people to lose faith in the British pound.
Norway and other countries like it that are not part of the EU have agreements in place which gives them access to the European Union’s single market. Keeping trade open and friendly provides the Scandinavian countries a lot of economic advantages. Norway is also free to strike its own bilateral trade deals with any other countries around the world. It has control of its fisheries too. A lot of British fishing companies wanted to leave the EU for this reason alone. They want British waters to be for the British only.
But it appears that the Norway model will not be the course of action to take for the UK. Most people are convinced that Britain will be opting for a hard Brexit, in which all formal ties with the European Union will be severed. This is wrecking havoc on the British currency. The pound is falling lower and lower as the shape of Brexit starts to become more clear. Last week on Friday is when it dropped to a 31 year low thanks to a flash crash which fortunately only lasted a couple of minutes. But it was enough to have an lasting impact. The crash sent the fourth most traded currency in the world down by 6%. The value of sterling fell to $1.18 USD, down from $1.26. It did manage to recover some of its losses by the end of the day but failed to return to its pre-crash levels. Analysts and traders scrambled to figure out what happened. Some believe its an overreaction by the markets to tough rhetoric by French president, François Hollande, who said there has to be a price to be paid for UK to leave the European Union. Others argue that the catalyst for the crash was actually a software glitch in a computer trading system.
Today the pound is sitting at $1.22. It’s hard to imagine that it was all the way up at $1.50 a year ago. Many currency speculators are saying the pound could drop even lower to $1.10 or even parity. If that is the case then it will probably be a good buying opportunity for the rest of the world. A cheaper pound is part of the adjustment phase for a country that’s transitioning its economy. Some exporters from the UK will be worse off after leaving the EU, but the devaluation of the currency will more than make up for that in economic activity. So overall, Britain should still come out ahead. Whatever damage is caused by leaving the EU in the short term will be more than made up for after the UK adjusts to its new reality in the long run.