The pound tumbled to $1.15 last week, its lowest level since 1985, and below the point it tumbled to in the wake of the Brexit vote.

But, unlike Brexit, the coronavirus crisis is a problem affecting the whole world, so why has sterling fallen so hard against the dollar?

Sterling remains a major global currency and UK government bonds are still considered a safe haven, but in times of crisis people rush to what they judge to be the safest places. And for financiers that is usually not the pound, but the American dollar and US Treasury bonds. 

We look back at the last time the pound traded this low against the dollar and why it has tumbled so hard in the coronavirus sell-off.

The pound tumbled to $1.15 on Wednesday, its lowest level since 1985

When the late Paul Volcker took over the U.S. Federal Reserve in 1979, the American economy was suffering an uncommon malady known as ‘stagflation’ – a mix of high unemployment and inflation.

To defeat this, the Fed raised interest rates to as high as 21.5 per cent at one point. The measure instigated a massive recession that made the austere Volcker a boogeyman for many. Protesting farmers drove around the Fed building in tractors to vent their anger.

Despite the substantial economic cost, the ‘Volcker shock’ helped to curb price rises. But it had another significant side effect. Investors rushed to purchase U.S. government bonds, thereby causing the dollar to appreciate sharply, making exports uncompetitive.

By February 1985, sterling was trading at a record low $1.05, and the U.S. trade deficit had almost quintupled to $122billion between 1980 and 1985.

The dollar only began to devalue following agreements at a meeting of finance ministers at New York’s Plaza Hotel that September.

Volcker’s extraordinary actions were a watershed moment in American financial history. Monetary policy went from the control of politicians to the technocrats, and the financial system started its journey to becoming the behemoth it is today.

An even more kaleidoscopic-shaking situation is rocking today’s financial markets. The coronavirus has caused extreme economic as well as social harm in the last few months.

 

Source: https://www.thisismoney.co.uk/

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