Why sterling is going 'to hell in a handbag'

Sterling has hit the skids, sliding to a 22-month low against the dollar, due in part to expectations of UK interest rate falls, low UK growth and a large current account deficit. And it won't stop falling for a while.

European holidays have already become 18% more expensive since last summer. Now shopping in America is becoming less and less of a bargain. Sterling has hit the skids, sliding to an 11-year low on a trade-weighted basis and a 22-month low against the dollar. It has now fallen by almost 7% to around $1.86 since the end of July.

Part of the story is the dollar's broader recovery amid sliding commodity prices and mounting fears over the growth outlook elsewhere. But the Bank of England's gloomy assessment of the economy last week prompted traders to pencil in UK rate cuts sooner than hitherto expected. The focus among global investors is now firmly on growth rather than inflation and "UK growth is falling to pieces", says David Bloom of HSBC. The reduction in the expected gap between American and British interest rates makes the pound less appealing relative to the dollar for global investors seeking high yields.

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