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Exchange rates: Sterling has summertime blues

"Our long-term view remains – we will eventually see 1.60 for cable and parity for EUR/GBP" -Paul Day, Mig Investments

Weighed down by the UK’s increasingly bleak economic outlook, sterling felt the full impact of the dollar’s resurgence in August.

There was no nice summer holiday for the UK’s currency in August. The pound found itself under extreme pressure and a combination of factors combined to send it sharply lower, especially against a resurgent US dollar. The exchange rate plunged from just a shade below $2 to the pound to a little above $1.80, its largest monthly fall since the distant days when sterling was pulled unceremoniously from the old European Exchange Rate Mechanism on September 16 1992.

There are both similarities and differences between the events of 16 years ago and those of today. Although the 1992 adjustment was dubbed Black Wednesday at the time – most probably as a result of a sense of losing national pride – many have since argued that sterling’s rapid decline enabled the UK to regain an economic competitive edge. Whether that will prove the case this time around is highly debatable.

Some commentators have claimed that the 1992 devaluation finally destroyed what was left of the then ruling Conservative party’s reputation, especially with regards to its steering of the UK economy.

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