Pound extends losses after reports Brexit would cost U.K. £66 billion
The British pound has extended losses on Tuesday against the dollar as Brexit fears persisted, while the yen lost ground against the greenback.
Sterling fell to $1.2304, from $1.2348 late Monday in New York. The pound’s loss this month so far has reached 5% on concerns about a potential hit from a “hard Brexit,” or a clean break with the European Union after the U.K.’s June vote to exit the block.
The U.K. faces tax revenue losses of £66 billion (around $81 million) annually if that hard Brexit becomes a reality, according to leaked government papers cited in media reports Tuesday. That loss would be due to Britain’s exit from the EU and reverting to World Trade Organization rules, which would result in a 9.5% drop in U.K. gross domestic product.
The draft cabinet committee paper, seen by newspapers such as The Guardian, is based on forecasts from a study into the effects of a hard exit from the EU. A report on the study was published in April by George Osborne, who lost his post as Chancellor of the Exchequer in the wake of the Brexit vote.
“It’s not unreasonable to think that ferocious flash crash was just a very tentative toe in the water and the pound is now plunging headlong into the abyss,” said Neil Wilson, markets analyst at ETX Capital, who said many think the pound could slip to as low as $1.20.
Wilson was referring to a brief and dramatic plunge seen by the pound last Friday in Asia, which some blamed on a fat-finger trade.
In real effective terms, sterling is 10% below where it was 1992 after leaving the European ERM — the exchange rate mechanism of the European Monetary System — and is now weaker than it was after the Lehman crisis, noted Kit Juckes, chief currency strategist at Société Générale,.
“Press comment is now shifting to embracing the positive effects of a weak pound, and in due course that’ll be true, but any further weakness from here might simply reflect loss of confidence and be bad for U.K. assets (gilts, equities, house prices, you name it…) in general,” he wrote in a note to clients Tuesday.
“The market is very short, but if sterling weakness starts to feed weakness across assets, we will have all the conditions for a classic overshoot to start….” Juckes said.
Buck bucks up: The dollar was higher against the yen Tuesday on improved appetite for risk, but the its gains were capped amid a lack of fresh incentives.
The greenback was at ¥103.94, compared with ¥103.61 late Monday in New York.
After a three-day weekend, Tokyo-based market participants returned to find the dollar had rebounded from a fall driven by disappointing nonfarm payroll data on Friday. Japanese financial markets were closed Monday for a national holiday.
Higher oil prices and polls showing Hillary Clinton’s solid lead in the presidential campaign helped improve the market sentiment, lifting the dollar against the Japanese currency.
Oil prices and the dollar typically move in opposite directions, because a stronger dollar makes it more expensive for holders of other currencies to buy oil. But against the Japanese currency, a higher oil price is supportive for the dollar by pressuring up inflation and long-term U.S yields. Higher oil prices also help worsen Japan’s trade balance, a factor boosting the dollar-yen pair as it weakens the Japanese currency.
Also, many investors think a Clinton victory will provide greater policy clarity and less uncertainty on trade negotiations.
There was muted reaction to comments by Federal Reserve of Chicago President Charles Evans that the U.S. economy is on a sound footing and that a December rate increase “could be fine.” “I wouldn’t be surprised if I was agreeable to a December meeting,” Evans said in remarks to reporters in Sydney, Australia, referring to a rate move.
In other trades, the euro was at $1.1109 midday from $1.1137. The common currency was at ¥115.46 from ¥115.53.
The WSJ Dollar Index a measure of the dollar against a basket of major currencies, was up 0.39% at 87.94.
Source: MarketWatch
